<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-24029
<TABLE>
<C> <C> <C>
[CHIEF AUTO PARTS LOGO] $130,000,000
CHIEF AUTO PARTS INC.
10 1/2% Senior Notes Due 2005
</TABLE>
Interest Payable May 15 and November 15 Due May 15, 2005
------------------
The 10 1/2% Senior Notes Due 2005 (the "Notes") of Chief Auto Parts Inc. (the
"Company") being offered pursuant to this Prospectus (the "Offering") will
mature on May 15, 2005. The Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after May 15, 2001 at the redemption
prices set forth herein plus accrued interest, if any, to the date of
redemption. In addition, up to an aggregate of 36% of the principal amount of
the Notes may be redeemed from time to time prior to May 15, 2000 at the
redemption price set forth herein plus accrued interest, if any, to the date of
redemption with the net proceeds of one or more Public Equity Offerings (as
defined), provided that at least 64% of the original principal amount of the
Notes remains outstanding after each such redemption. Upon a Change of Control
(as defined), each holder of Notes may require the Company to repurchase such
Notes at 101% of the principal amount thereof plus accrued interest, if any, to
the date of repurchase.
The Notes will be unsecured senior obligations of the Company and will rank pari
passu with all existing and future unsecured senior indebtedness of the Company
and senior to any subordinated indebtedness of the Company. As of March 30,
1997, after giving pro forma effect to the Recapitalization (as defined) as if
it had occurred on such date, the aggregate amount of secured indebtedness of
the Company, to which the Notes would be effectively subordinated, would have
been $9.1 million and the Company would have had $74.7 outstanding indebtedness
ranking pari passu with the Notes (consisting of trade accounts payable).
Contemporaneously with the consummation of the Offering, the Company will effect
the Recapitalization, including entering into a credit facility (the "New Credit
Facility") with a group of banks providing for up to $100.0 million of revolving
credit loans and paying an aggregate of approximately $79.0 million to
controlling stockholders and management of the Company, a portion of which will
be a partial return of capital and a portion of which will be used by management
to fund option exercises and to pay for prior purchases of the Company's Common
Stock. The Offering is conditioned upon the concurrent consummation of each of
the other elements of the Recapitalization. See "Description of the Notes,"
"Description of New Credit Facility," "The Recapitalization," "Use of Proceeds"
and "Benefits to Related Parties."
There is no established trading market for the Notes, and the Company does not
intend to apply for listing of the Notes on any securities exchange or for
quotation on the Nasdaq National Market.
Settlement of the Notes will be made in immediately available funds. The Notes
will trade in the Same-Day Funds Settlement System of The Depository Trust
Company (the "Depositary"), and, to the extent that secondary market trading
activity in the Notes is effected through the facilities of the Depositary, such
trades will be settled in immediately available funds. All payments of principal
and interest will be made by the Company in immediately available funds.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 9.
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>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) THE COMPANY(3)
--------- -------------- --------------
<S> <C> <C> <C>
Per Note................... 100.00% 2.92% 97.08%
Total...................... $130,000,000 $3,800,000 $126,200,000
</TABLE>
(1) Plus accrued interest, if any, from May 28, 1997.
(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 deduction of expenses payable by the Company estimated at $670,000.
------------------
The Notes are offered by the Underwriters when, as and if issued by the Company,
delivered to and accepted by the Underwriters, and subject to their right to
reject orders, in whole or in part. It is expected that delivery of the Notes,
in book-entry form through the facilities of the Depositary, will be made on or
about May 28, 1997, against payment in immediately available funds.
------------------
CREDIT SUISSE FIRST BOSTON SALOMON BROTHERS INC
------------------
Prospectus dated May 22, 1997.
<PAGE> 2
[ARTWORK]
Photograph of Chief Auto Parts store; map of states where Chief stores are
located; text: "Chief Auto Parts -- Dedicated to Quality Products and Service.
547 Stores and Growing."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
i
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. As used
herein and except as the context otherwise may require, the "Company" or "Chief"
means Chief Auto Parts Inc. and references to a certain fiscal year of the
Company mean the fiscal year ended on the last Sunday of that calendar year
(e.g., fiscal 1996 means the fiscal year ended December 29, 1996). This
Prospectus contains, in addition to historical information, forward-looking
statements that include risks and other uncertainties. The Company's actual
results may differ materially from those anticipated in these forward-looking
statements. Factors that might cause such a difference include those discussed
under "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as general economic
and business conditions, competition and other factors discussed elsewhere in
this Prospectus. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements that may reflect events or
circumstances after the date hereof or the occurrence of anticipated or
unanticipated events.
THE COMPANY
Chief is one of the nation's largest auto parts and accessories retail
chains, both in number of stores and annual revenue, with 547 retail stores as
of March 30, 1997 located in six states, primarily concentrated in Southern
California and Texas. The Company's research indicates that it is a market
leader based on number of stores in its six primary markets -- Los Angeles,
Dallas/Fort Worth, Sacramento, San Diego, Las Vegas and Fresno -- with more than
twice as many stores as its nearest competitor in the Los Angeles market. The
Company is a consumer-oriented, specialty aftermarket retailer, primarily
serving do-it-yourself ("DIY") customers and, to a lesser extent, commercial
customers. Chief's product mix of approximately 16,000 stock keeping units
("SKUs") in its typical retail store features nationally known brand names, as
well as private label automotive parts, including new and remanufactured hard
parts, accessories and maintenance items.
The Company's Chief Executive Officer, David H. Eisenberg, joined the
Company in 1992 and subsequently recruited many of the Company's current senior
executives. Since fiscal 1993, net sales and EBITDA (as defined in note (f) to
the Summary Financial and Other Data table) have increased an average of 5.4%
and 18.6% per year, respectively, to $438.2 million and $33.3 million,
respectively, in fiscal 1996, although net income decreased by approximately
88.4% from fiscal 1995 to fiscal 1996. Chief's management team has instituted a
number of initiatives designed to promote the Company's image as a premier
retailer for the DIY customer including a focus on competitive pricing and
superior customer service; investment in store expansions, relocations and
remodelings; and enhancement of information systems to improve customer service,
productivity and inventory management.
In June 1994, TCW Special Credits Fund V -- The Principal Fund, a private
equity investment fund ("The Principal Fund"), and certain of its affiliates
acquired Chief through the merger of a shell corporation with the Company.
Pursuant to a subadvisory agreement, Oaktree Capital Management LLC ("Oaktree")
manages The Principal Fund. The acquisition significantly deleveraged the
Company, providing it with access to growth capital and allowing management to
focus on operational improvements and growth. The support and flexibility
afforded by this change in Chief's capital structure enabled management to
reposition the Company from a chain of smaller automotive parts convenience
stores to a full-line auto parts and accessories chain. Since June 1994, the
Company has invested approximately $45.1 million in total capital expenditures
in connection with its program to reposition Chief in the automotive aftermarket
marketplace and has doubled the average number of SKUs in its stores. During
this period, the Company remodeled 292 of its stores, opened 99 new stores,
relocated 19 stores to larger, more favorable locations averaging 5,390 square
feet (an increase from approximately 2,740 square feet for such stores prior to
relocation), closed 45 small or underperforming stores and introduced Chief's
commercial sales program into 32 existing stores (as of April 30, 1997, 16 of
which were opened in the last 60 days). The Company has substantially completed
its program of repositioning Chief as a full-line auto parts and accessories
chain.
<PAGE> 4
Chief's redesigned store layouts and enhanced product offerings enable the
Company to merchandise store product lines to target more effectively the needs
of the DIY customer, resulting in increased sales of "hard parts" (such as
alternators and starters) which carry higher margins and higher average
transaction prices than many of the Company's other products, such as motor oil.
These improvements also have contributed to an increase in gross profit margins
and EBITDA margins (as defined in note (g) to the Summary Financial and Other
Data table) from 37.9% and 6.3%, respectively, in fiscal 1994 to 42.5% and 7.6%,
respectively, in fiscal 1996.
Management believes that the automotive aftermarket parts industry is
growing as a result of: (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. Management further believes that the retail
auto parts industry displays certain recession-resistant characteristics
resulting from a shift from professional repairs to DIY repairs during economic
downturns and sales increases in automobile enhancement products during better
economic conditions.
OPERATING STRENGTHS AND BUSINESS STRATEGIES
Chief attributes its present success and significant opportunities for
continued growth to the following operating strengths and business strategies:
- Leading position in favorable markets. The Company's research indicates
that it is a market leader based on number of stores in its six primary
markets -- Los Angeles, Dallas/Fort Worth, Sacramento, San Diego, Las
Vegas and Fresno -- with more than twice as many stores as its nearest
competitor in the Los Angeles market. California and Texas are the two
largest states in the country in terms of vehicle registration and
population, and both have climates suited for year-round outdoor auto
repair activities. The Company has achieved a high level of name
recognition with its customers in these markets as a result of
consistently providing high quality products and customer service.
- Investments in store relocation, expansion and remodeling. Chief has
focused on relocating and expanding existing stores to larger locations
with more customer-friendly layouts and identifying desirable locations
for opening new stores, primarily in existing markets. The Company also
significantly redesigned its store layout and remodeled 292 of its stores
from June 1994 through March 1997. Seventy-four percent of the Company's
existing store base is either new or has been remodeled since June 1994.
Chief plans to open 40 new stores, to relocate or expand at least 25
stores and to complete 80 remodels in 1997 at an aggregate estimated cost
of $11.1 million. The Company plans to remodel 15 stores each year for
the four year period beginning January 1, 1998 at an estimated total cost
of $10.7 million. The Company expects to finance such activity with a
combination of funds generated from operations and borrowings under the
New Credit Facility.
- Enhancement of management information systems. Management has adopted a
strategy of enhancing Chief's customer service, productivity, inventory
and merchandising management through the implementation of new and
improved technology-based systems, including (i) the integration of its
point-of-sale system and electronic parts catalog, (ii) the introduction
and continued roll-out of perpetual inventory systems in its stores and
(iii) the installation of portable, hand-held radio frequency computer
devices to automate price management, receiving, shipping and ordering
functions in each store and distribution center and to facilitate the
management of the perpetual inventory system. Management believes these
systems should contribute to improved profitability.
- Commercial sales program. The Company recently initiated its commercial
sales program, marketed towards the commercial segment of the automotive
aftermarket industry, which the Company believes constitutes
approximately $40-$45 billion of the total estimated $75 billion annual
sales for the automotive aftermarket industry. In stores with commercial
sales capabilities, Chief offers commercial customers over 20,000 SKUs
delivered within 30 minutes from time of order. As of April 30, 1997, the
Company has introduced commercial sales capabilities into 32 of its
existing stores, 16 of which were opened within the last 60 days at an
estimated cost of $500,000. Chief believes that a successful
2
<PAGE> 5
commercial sales program will complement the Company's existing retail
business. The Company will evaluate the performance of its existing
commercial sales program before planning any expansion of the program
into additional stores.
- Emphasis of competitive advantages over smaller retailers. The Company
will continue to consolidate its position in key markets by enhancing its
competitive advantages over smaller competitors including: (i) economies
of scale in advertising, distribution and warehousing; (ii) an ability to
stock and warehouse a larger number of SKUs, including private label
brands; (iii) lower product costs as a result of purchasing directly from
manufacturers rather than through distributors; (iv) an ability to
attract talented employees and offer attractive career paths; (v)
superior customer service due to better information systems and
continuous employee training; and (vi) a greater number of locations and
extended store hours.
- Strong management team with significant equity ownership. Chief's
management team has repositioned the Company from a chain of smaller
automotive parts convenience stores to a full-line auto parts and
accessories chain. Four of the Company's top executives, including the
Chief Executive Officer, David H. Eisenberg, joined the Company following
their management of Peoples Drug Stores Incorporated, a drugstore chain
with approximately 500 locations. The Company's six senior executives
average more than 24 years of experience in the retail industry and
possess a diverse skill base which incorporates marketing, merchandising,
distribution, management information systems integration and customer and
vendor relationships. Senior management owns 9.2% of Chief's common stock
on a fully diluted basis.
The Company is a Delaware corporation. Its principal offices are located at
One Lincoln Centre, Suite 200, 5400 LBJ Freeway, Dallas, Texas 75240-6223 and
its telephone number is (972) 341-2000.
THE OFFERING
Securities Offered......... $130,000,000 aggregate principal amount of 10 1/2%
Senior Notes due 2005 of the Company.
Maturity Date.............. May 15, 2005.
Interest Payment Dates..... May 15 and November 15 of each year, commencing
November 15, 1997.
Optional Redemption........ The Notes may be redeemed at the option of the
Company, in whole or in part, at any time on or
after May 15, 2001 at the redemption prices set
forth herein, plus accrued interest, if any, to the
date of redemption. Up to an aggregate of 36% of
the principal amount of the Notes may be redeemed
from time to time prior to May 15, 2000 at the
option of the Company at the redemption prices set
forth herein plus accrued interest, if any, to the
date of redemption, with the net cash proceeds of
one or more Public Equity Offerings provided that
at least 64% of the original aggregate principal
amount of the Notes remains outstanding immediately
after each such redemption. See "Description of the
Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control, each holder of Notes may
require the Company to make an offer to repurchase
such holder's outstanding Notes at a price equal to
101% of the principal amount thereof plus accrued
interest, if any, to the date of repurchase. The
New Credit Facility will prohibit the purchase of
Notes by the Company in the event of a Change of
Control unless and until any indebtedness under the
New Credit Facility is paid in full. The Company's
failure to purchase the Notes would result in a
default under the Indenture. The remedy available
to holders of the Notes in the event of a default
under the Indenture is the acceleration of
indebtedness under the Indenture. If the Company
should fail to pay amounts due upon acceleration of
the Notes, the holders of the Notes would be
entitled to seek legal or equitable remedies
against the Company. A default or acceleration of
Indebtedness under the Indenture would result in a
default
3
<PAGE> 6
under and could result in an acceleration of
amounts due under the New Credit Facility. The
restrictions which the New Credit Facility places
on the Company's ability to repurchase the Notes do
not affect the ability of the holders of the Notes
to cause the acceleration of the Notes if the
Company defaults in its obligations under the
Indenture or their ability to seek legal or
equitable remedies against the Company if the
Company is unable to pay such accelerated amounts.
A Change of Control has the same definition in the
Indenture and the New Credit Facility, and
therefore, a Change of Control which would trigger
a default under the New Credit Facility would
trigger the Company's repurchase obligations under
the Indenture. The failure of the Company to pay
any other Indebtedness which exceeds $10.0 million
will also cause a default under the Indenture. The
Change of Control provisions of the Indenture may
be amended with the consent of the holders of a
majority in principal amount of the Notes then
outstanding. The Company may not be able to fund
the repurchase of all the Notes in the event of a
Change of Control. See "Risk Factors -- Change of
Control," "Description of the Notes -- Change of
Control," "-- Certain Covenants" and "-- Defaults."
Ranking.................... The Notes will be unsecured senior obligations of
the Company and will rank pari passu in right of
payment with all existing and future senior
unsecured indebtedness of the Company, if any, and
will rank senior in right of payment to any
subordinated indebtedness of the Company. As of
March 30, 1997, after giving pro forma effect to
the Recapitalization as if it had occurred on such
date, the aggregate amount of the Company's
outstanding secured indebtedness, to which the
Notes would be effectively subordinated, would have
been approximately $9.1 million and the Company
would have had $74.7 million of outstanding
indebtedness ranking pari passu with the Notes
(consisting of trade accounts payable). In
connection with the Recapitalization, the Company
will enter into the New Credit Facility, which will
mature on May 28, 2002. See "Description of the
Notes -- Ranking."
Restrictive Covenants...... The indenture under which the Notes will be issued
(the "Indenture") will contain certain covenants
that, among other things, will limit the ability of
the Company and/or its Restricted Subsidiaries (as
defined) to (i) incur additional indebtedness, (ii)
pay dividends or make certain other restricted
payments, (iii) make investments, (iv) enter into
transactions with affiliates, (v) make certain
asset dispositions and (vi) merge or consolidate
with, or transfer substantially all of its assets
to, another person. The Indenture also will limit
the ability of the Company's Restricted
Subsidiaries to issue Capital Stock (as defined)
and to create restrictions on the ability of such
Restricted Subsidiaries to pay dividends or make
any other distributions. In addition, the Company
will be obligated to offer to repurchase Notes at a
purchase price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase, with the net
cash proceeds of certain sales or other
dispositions of assets only to the extent that an
excess of cash is available after application of
such net cash proceeds pursuant to the terms of the
Indenture. However, all of these limitations and
prohibitions are subject to a number of important
qualifications. A default under certain of the
Company's other financial obligations could result
in a default under the Indenture. See "Description
of the Notes -- Certain Covenants" and
"-- Defaults."
4
<PAGE> 7
Limitation on Liability.... No director, officer, employee, incorporator,
controlling person or stockholder of the Company,
as such, shall have any liability for any
obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of,
or by reason of, such obligations or their
creation. Each holder of Notes by accepting a Note
waives and releases all such liability. The waiver
may not be effective to waive liabilities under the
federal securities laws and it is the view of the
Commission (as defined) that such waiver is against
public policy.
THE RECAPITALIZATION
In connection with the Offering, the Company and its stockholders will
effect a series of transactions that will result in a recapitalization of the
Company (such transactions are collectively referred to herein as the
"Recapitalization"). The elements of the Recapitalization consist of (i) the
completion of the Offering (estimated to result in approximately $125.5 million
of net proceeds), (ii) the exercise of outstanding options to purchase 4,839.97
shares of common stock of the Company, par value $0.01 per share (the "Common
Stock"), by management for aggregate proceeds of $6.9 million, (iii) the
repayment by members of management of approximately $910,000, a portion of the
amounts owed to the Company under certain promissory notes, (iv) the
establishment of the New Credit Facility, which will provide for $100.0 million
of revolving credit facilities, and (v) the application of the aggregate net
proceeds from the foregoing as described under "Use of Proceeds." Consummation
of each of the foregoing transactions is subject to the simultaneous
consummation or effectiveness, as applicable, of each of the other elements of
the Recapitalization. See "The Recapitalization," "Use of Proceeds," "Benefits
to Related Parties," "Certain Transactions" and "Description of New Credit
Facility."
USE OF PROCEEDS
The net proceeds from the sale of the Notes are estimated to be
approximately $125.5 million (after deduction of discounts to the Underwriters
and other expenses). The Company intends to use the aggregate net proceeds from
the Recapitalization (i) to repay all outstanding indebtedness (approximately
$65.0 million) under its existing credit facility (the "Existing Credit
Facility"), (ii) to pay certain employees of the Company an aggregate of $4.0
million for previously accrued employee incentive compensation and (iii) to
distribute approximately $75.0 million to the stockholders of the Company
(consisting of approximately $64.2 million to The Principal Fund and its
affiliates and $10.8 million to management stockholders, of which approximately
$7.8 million will be used by certain management stockholders to exercise options
and repay certain loans pursuant to the Recapitalization). See "The
Recapitalization," "Use of Proceeds" and "Benefits to Related Parties."
BENEFITS TO RELATED PARTIES
The Principal Fund, its affiliates and certain management stockholders will
receive an aggregate of $75.0 million in the Recapitalization. Approximately
$6.9 million of such $75.0 million will be used by management stockholders to
exercise their outstanding options to purchase 4,839.97 shares of the Common
Stock of the Company. Approximately $910,000 of such $75.0 million will be used
by management stockholders to repay a portion of amounts owed to the Company
under certain promissory notes. Approximately $64.2 million and approximately
$3.0 million will be distributed to The Principal Fund and its affiliates, and
to management stockholders, respectively, as a partial return of such
stockholders' investment in Chief. These payments are the first dividend or
return of investment that the stockholders have received since the time of The
Principal Fund's investment in the Company in June 1994. The Principal Fund's
investment significantly deleveraged the Company at a time when management
needed a flexible capital structure in order to implement its plan to reposition
Chief as a full-line auto parts and accessories chain. Because the Company has
substantially completed its program of repositioning Chief, the Company has
decided to provide its stockholders with a partial return of their initial
investment in Chief.
RISK FACTORS
Prospective purchasers of the Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, the information set
forth under "Risk Factors" before making an investment in the Notes.
5
<PAGE> 8
SUMMARY FINANCIAL AND OTHER DATA
The following summary financial and other data have been derived from, and
should be read in conjunction with, the Financial Statements and related notes
thereto included elsewhere in this Prospectus. The Company's fiscal year is the
52- or 53-week period ending on the last Sunday in December. All fiscal years
presented are 52 weeks, except fiscal 1995, which is 53 weeks. In addition, the
Company was a party to a merger effective June 27, 1994 (the "Merger") which was
accounted for using the purchase method. The results of operations subsequent to
the Merger are not comparable to the results prior to the Merger due to certain
purchase accounting adjustments. See "Selected Financial and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
PREDECESSOR(A) SUCCESSOR(A)
---------------------------------------- ------------------------------------------
YEARS ENDED SIX MONTHS SIX MONTHS YEARS ENDED
--------------------------- ENDED ENDED ---------------------------
DECEMBER 27, DECEMBER 26, JUNE 26, DECEMBER 25, DECEMBER 31, DECEMBER 29,
1992 1993 1994 1994 1995 1996
------------ ------------ ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $371,347 $374,618 $195,286 $203,878 $429,047 $438,182
Gross profit(b)........... 137,651 150,075 80,834 70,488 177,419 186,418
Selling, general and
administrative
expenses(c)............. 148,498 131,125 68,642 70,500 145,829 167,064
Operating income
(loss)(b)(c)............ (22,590) 11,427 8,566 (5,032) 21,193 7,732
Net income (loss)(b)(c)... (32,220) 226 1,417 (8,098) 9,479 1,104
<CAPTION>
SUCCESSOR(A)
---------------------
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 30,
1996 1997
--------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $102,260 $109,854
Gross profit(b)........... 43,681 46,573
Selling, general and
administrative
expenses(c)............. 36,485 41,017
Operating income
(loss)(b)(c)............ 4,530 2,305
Net income (loss)(b)(c)... 1,672 170
</TABLE>
<TABLE>
<CAPTION>
MARCH 30, 1997
-----------------------
ACTUAL ADJUSTED(D)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................... $ 1,138 $ 1,138
Working capital............................................. 47,843 48,245
Total assets................................................ 299,472 303,003
Total debt, including current maturities(e)................. 81,622 157,708
Stockholders' equity........................................ 71,650 3,492
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR(A) SUCCESSOR(A)
---------------------------------------- ------------------------------------------
YEARS ENDED SIX MONTHS SIX MONTHS YEARS ENDED
--------------------------- ENDED ENDED ---------------------------
DECEMBER 27, DECEMBER 26, JUNE 26, DECEMBER 25, DECEMBER 31, DECEMBER 29,
1992 1993 1994 1994 1995 1996
------------ ------------ ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER STORE SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(f)................. $ (1,407) $ 20,133 $12,233 $ 12,869 $ 31,385 $ 33,288
EBITDA margin(g).......... (0.4)% 5.4% 6.3% 6.3% 7.3% 7.6%
Gross margin.............. 37.1% 40.1% 41.4% 34.6% 41.3% 42.5%
Capital expenditures...... $ 6,100 $ 6,178 $ 5,885 $ 6,512 $ 11,822 $ 23,275
Ratio of earnings to fixed
charges(h).............. (h) 1.0x 1.3x (h) 2.0x 1.1x
SELECTED ADDITIONAL
OPERATING DATA:
Average net sales per
store(i)................ $ 727 $ 759 $ 397 $ 413 $ 845 $ 824
Average net sales per
store square foot(i).... 220 229 118 121 242 223
Percentage change in
comparable store net
sales(j)................ 4.5% 1.8% 6.0% 3.9% 1.8% (2.6)%
PRO FORMA DATA:
Interest expense, net
(historical)............ $ 6,203
Interest expense, net..... 17,711
Cash interest
expense(k).............. 16,752
Ratio of total debt to
EBITDA(e)(l)............ 4.7x
Ratio of EBITDA to cash
interest
expense(k)(l)........... 2.0x
Ratio of earnings to fixed
charges(h).............. (h)
<CAPTION>
SUCCESSOR(A)
---------------------
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 30,
1996 1997
--------- ---------
<S> <C> <C>
OTHER DATA:
EBITDA(f)................. $ 7,131 $ 5,546
EBITDA margin(g).......... 7.0% 5.0%
Gross margin.............. 42.7% 42.4%
Capital expenditures...... $ 4,398 $ 3,536
Ratio of earnings to fixed
charges(h).............. 1.8x 1.1x
SELECTED ADDITIONAL
OPERATING DATA:
Average net sales per
store(i)................ $ 195 $ 201
Average net sales per
store square foot(i).... 54 52
Percentage change in
comparable store net
sales(j)................ (2.7)% 2.0%
PRO FORMA DATA:
Interest expense, net
(historical)............ $ 1,784
Interest expense, net..... 4,563
Cash interest
expense(k).............. 4,323
Ratio of total debt to
EBITDA(e)(l)............ (m)
Ratio of EBITDA to cash
interest
expense(k)(l)........... 1.3x
Ratio of earnings to fixed
charges(h).............. (h)
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
PREDECESSOR(A) SUCCESSOR(A)
---------------------------------------- ------------------------------------------
YEARS ENDED SIX MONTHS SIX MONTHS YEARS ENDED
--------------------------- ENDED ENDED ---------------------------
DECEMBER 27, DECEMBER 26, JUNE 26, DECEMBER 25, DECEMBER 31, DECEMBER 29,
1992 1993 1994 1994 1995 1996
------------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED STORE DATA:
Beginning stores.......... 526 495 492 493 495 520
New stores................ 2 14 9 9 34 51
Relocated stores.......... 2 1 4 2 3 12
Closed stores (including
relocated stores)....... (35) (18) (12) (9) (12) (39)
-------- -------- ------- -------- -------- --------
Ending stores........... 495 492 493 495 520 544
======== ======== ======= ======== ======== ========
Remodeled stores.......... 25 29 13 25 90 159
Average square footage per
store(i)................ 3,312 3,321 3,362 3,408 3,489 3,695
Total square footage at
period end (in
thousands)(i)........... 1,639 1,639 1,673 1,694 1,848 2,084
<CAPTION>
SUCCESSOR(A)
---------------------
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 30,
1996 1997
--------- ---------
<S> <C> <C>
SELECTED STORE DATA:
Beginning stores.......... 520 544
New stores................ 12 5
Relocated stores.......... 2 2
Closed stores (including
relocated stores)....... (4) (4)
-------- --------
Ending stores........... 530 547
======== ========
Remodeled stores.......... 91 18
Average square footage per
store(i)................ 3,589 3,853
Total square footage at
period end (in
thousands)(i)........... 1,921 2,120
</TABLE>
- ---------------
(a) "Successor" refers to Chief Auto Parts Inc. subsequent to the Merger.
"Predecessor" refers to Chief Auto Parts Inc. prior to the Merger. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Pro Forma 1994 Information" for further information regarding
the Merger.
(b) Year ended December 27, 1992 includes a $6.7 million non-cash provision
related to discontinued inventory. Six months ended December 25, 1994
includes a $12.9 million Merger-related inventory charge.
(c) Year ended December 27, 1992 includes a $7.5 million non-cash provision
primarily related to the Company's exit from the Nashville and Phoenix
markets and a $3.5 million non-cash provision related to various insurance
reserves. Year ended December 29, 1996 includes a $14.0 million non-cash
provision for (i) store closings primarily related to the Company's exit
from the Little Rock market and (ii) legal reserves.
(d) The adjusted balance sheet data as of March 30, 1997 give effect to the
Recapitalization as if it had occurred on March 30, 1997.
(e) Total debt comprises long-term borrowings and capital leases.
(f) EBITDA represents income (loss) before interest expense (net), income
taxes, depreciation and amortization and, (i) in year ended December 27,
1992, excludes a $7.5 million non-cash provision primarily related to the
Company's exit from the Nashville and Phoenix markets, (ii) in six months
ended December 25, 1994, excludes a $12.9 million Merger-related inventory
charge, (iii) in year ended December 29, 1996, excludes a $14.0 million
non-cash provision for (A) store closings primarily related to the
Company's exit from the Little Rock market and (B) legal reserves and (iv)
in the three months ended March 30, 1997 includes $1.9 million of expenses
related to the launch of "The All New Chief" campaign in the Los Angeles,
California market (excluding such expenses, EBITDA for such period would
have been $7.4 million). EBITDA is used by the Company for the purpose of
analyzing operating performance, leverage and liquidity. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to
cash flows as a measure of liquidity.
(g) EBITDA margin represents EBITDA as a percentage of net sales. EBITDA margin
for the three months ended March 30, 1997 includes $1.9 million of expenses
related to the launch of "The All New Chief" campaign in the Los Angeles,
California market. Excluding such expenses, EBITDA margin for such period
would have been 6.7%.
(h) The ratio of earnings to fixed charges is computed by aggregating income
before income taxes and fixed charges and dividing the total by fixed
charges. Fixed charges comprise interest on all indebtedness including
capital leases and amortization of debt expense, and one-third of rental
expense (being that portion of rental expense representative of an interest
factor). During the year ended December 27, 1992 and the six months ended
December 25, 1994, earnings were insufficient to cover fixed charges by
$32.7 million and $7.6 million, respectively, and accordingly such ratios
are not presented. The pro forma ratio of earnings to fixed charges gives
effect to the Recapitalization as if it had occurred on January 1, 1996. On
a pro forma basis, during the year ended December 29, 1996, earnings were
insufficient to cover fixed charges by $10.2 million, and accordingly such
ratio is not presented. On a pro forma basis, during the three months ended
March 30, 1997, earnings were insufficient to cover fixed charges by $2.3
million, and accordingly such ratio is not presented.
(i) Average net sales per store, average square footage per store and average
net sales per store square foot are based on the average of the 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. Total square footage at period end is based on the Company's
actual store formats and includes normal selling, office, stockroom and
receiving space.
(j) The percentage change in comparable store net sales is calculated as the
net change in sales for each comparable store for the equivalent period in
the prior year. Comparable stores are stores that have been operating for
more than 12 months since first opening. During the 13th month of
operations, new stores are considered comparable stores. Stores which have
been relocated are treated as comparable stores. Closed stores are not
categorized as comparable stores.
(k) Pro forma cash interest expense for the year ended December 29, 1996 and the
three months ended March 30, 1997 is pro forma interest expense, excluding
amortization of deferred financing costs, and gives effect to the
Recapitalization as if it had occurred on January 1, 1996 and December 30,
1996, respectively, assuming a composite interest rate of 7.5% on the New
Credit Facility. No interest income has been assumed on average excess cash
invested of approximately $5.3 million during year ended December 29, 1996.
7
<PAGE> 10
(l) Ratios concerning EBITDA are included as they are generally recognized as
providing useful information regarding a company's ability to service
and/or incur debt. Such ratios are also relevant for covenant analysis
under the Indenture.
(m) This ratio is not presented for the three months ended March 30, 1997
because the Company believes the ratio of total debt to EBITDA, in which
total debt is compared to quarterly EBITDA, is not an accurate or meaningful
representation of full year results.
8
<PAGE> 11
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
risk factors, as well as the other information set forth elsewhere in this
Prospectus. This Prospectus contains, in addition to historical information,
forward-looking statements that include risks and other uncertainties. The
Company's actual results may differ materially from those anticipated in these
forward-looking statements. Factors that might cause such a difference include
those discussed below, as well as general economic and business conditions,
competition and other factors discussed elsewhere in this Prospectus.
LITIGATION
The Company is the defendant in two lawsuits alleging that the Company
failed to pay store managers and associate store managers in California for
overtime compensation as required by California law. On September 21, 1993, a
lawsuit was filed in the Superior Court of California, County of Alameda by
Stephen Cooper, a manager, on his own behalf and on behalf of all persons
similarly situated. Mr. Cooper is alleging that the Company's store managers and
associate store managers in California are not exempt employees under California
law, and that the Company failed to compensate its store managers and associate
store managers for overtime compensation as required by California law. In
December 1994, the court denied class certification to Mr. Cooper. However,
since the date this lawsuit was filed, approximately 242 current and former
employees have joined Mr. Cooper's lawsuit. In addition to the claims filed in
Alameda County, 15 current and former employees filed a lawsuit based on the
same claims against the Company on March 5, 1996 in the Superior Court of
California, County of San Joaquin. The Company is vigorously defending against
the claims of all plaintiffs.
In September 1996, at the recommendation of the Alameda court, the parties
submitted to binding arbitration with respect to eight of the Cooper plaintiffs.
On March 10, 1997, the arbitrator ruled in favor of the eight plaintiffs
involved in the arbitration with respect to liability, finding that these eight
plaintiffs are entitled to (i) compensation for the overtime hours they worked,
(ii) an additional amount equal to 30 days' compensation (in the case of the
seven plaintiffs no longer employed by the Company) as waiting time penalties
for the Company's "willful" failure to pay overtime compensation, (iii) interest
on such unpaid compensation and (iv) reasonable attorneys' fees and costs of
arbitration. The arbitrator has not yet made any determination with respect to
calculation of damages. This arbitration decision has no binding precedential or
stare decisis effect on the remaining 235 plaintiffs' cases. However, regardless
of the outcome of the damage phase of the arbitration, the Company may have to
litigate, arbitrate or settle the remaining cases and may incur significant
legal expenses in connection therewith, and the Company could be subject to
significant compensatory damages or settlement costs. In addition, there are
approximately 700 store managers and associate store managers previously or
currently employed by the Company in California who have not brought or joined
in the suit against the Company as of the date hereof. Following the Alameda
court's denial of class certification to the plaintiffs, the court required the
Company to send notice in October 1995 to all potential plaintiffs (current and
former managers as of that date) notifying them of this action and providing
them the opportunity to contact the plaintiffs' attorney. The Company is
currently conducting settlement discussions with the 243 plaintiffs. Management
is unable to predict the outcome of the damage phase of the arbitration, the
remaining lawsuits or the settlement discussions, or the probability of
additional lawsuits, at this time. However, if a significant number of
plaintiffs were to prevail on all elements of their claims against the Company
or if a significant number of additional current or former managers were to
bring suit and prevail as noted above, it could have a material adverse effect
on the Company. See "Business -- Legal Proceedings."
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
In connection with the Offering, the Company will incur a significant
amount of indebtedness. As a result, following the completion of the Offering,
the Company will be highly leveraged and will have substantial repayment
obligations, as well as significantly increased interest expense. As of March
30, 1997, after giving effect to the Recapitalization as if it had occurred on
such date, the Company's total indebtedness would have been approximately $157.7
million. In addition, subject to the restrictions in the New Credit Facility and
the Indenture, the Company may incur additional indebtedness from time to time
to finance acquisitions or capital expenditures or for other purposes.
9
<PAGE> 12
The Company's ability to make scheduled payments of principal or interest
on, or to refinance, its indebtedness will depend on future operating
performance and cash flow, which are subject to prevailing economic conditions,
prevailing interest rate levels and financial, competitive, business and other
factors beyond its control. The degree to which the Company is leveraged could
have important consequences to holders of the Notes, 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 Notes and interest on its
other existing indebtedness, thereby reducing the funds available to the Company
for other purposes; (iii) the agreements governing the Company's long-term
indebtedness contain certain restrictive financial and operating covenants; (iv)
all of the indebtedness under the New Credit Facility will be at variable rates
of interest, ranging from 0.5% to 1.0% above the Base Rate (as defined on page
48) or, at the Company's option, from 1.5% to 2.5% above the Eurodollar Rate (as
defined on page 48), which would cause the Company to be vulnerable to increases
in interest rates; (v) all of the indebtedness outstanding under the New Credit
Facility will be secured by all inventory and accounts receivable of the Company
and will become due prior to the time the principal on the Notes will become
due; (vi) the Company is substantially more leveraged than certain of its
competitors, which might place the Company at a competitive disadvantage; (vii)
the Company may be hindered in its ability to adjust rapidly to changing market
conditions; (viii) the Company's substantial degree of leverage may negatively
affect certain vendors' willingness to give the Company favorable payment terms;
and (ix) 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. See "Description of New Credit Facility."
The Company believes that, based upon anticipated levels of operations, it
should be able to meet its debt service obligations, including interest payments
on the Notes, when due. If, however, the Company cannot generate sufficient cash
flow from operations to meet its obligations, the Company might be required to
refinance its debt or to dispose of assets to obtain funds for such purpose.
There is no assurance that refinancings or asset dispositions could be effected
on satisfactory terms, if at all, or would be permitted by the terms of the New
Credit Facility or the Indenture pursuant to which the Notes will be issued. In
the event that the Company is unable to refinance the New Credit Facility or
raise funds through asset sales, sales of equity or otherwise, its ability to
pay principal of and interest on the Notes would be adversely affected. Pro
forma for the Recapitalization as if it had occurred on January 1, 1996,
earnings were insufficient to cover fixed charges during the year ended December
29, 1996 by $10.2 million and during the three months ended March 30, 1997 by
$2.3 million.
RANKING
The Indenture permits the Company to incur additional senior indebtedness,
provided certain financial or other conditions are met. The Notes will be senior
unsecured obligations and will rank pari passu in right of payment with all
existing and future senior unsecured indebtedness. As of March 30, 1997, after
giving pro forma effect to the Recapitalization as if it had occurred on such
date, the aggregate amount of secured indebtedness of the Company, to which the
Notes would be effectively subordinated, would have been $9.1 million and the
Company would have had $74.7 million of outstanding indebtedness ranking pari
passu with the Notes, (consisting of trade accounts payable). Holders of
existing or future secured indebtedness of the Company permitted under the
Indenture, including the New Credit Facility, will have claims with respect to
the assets constituting collateral that are prior to the claims of holders of
the Notes. See "Description of the Notes -- Ranking."
RESTRICTIVE LOAN COVENANTS
The New Credit Facility will include certain covenants that, among other
things, restrict: (i) the making of investments, loans and advances and the
paying of dividends and other restricted payments; (ii) the incurrence of
additional indebtedness; (iii) the granting of liens, other than liens created
pursuant to the New Credit Facility and certain permitted liens; (iv)
consolidations and sales of all or a substantial part of the Company's business
or property; and (v) the sale of assets. The New Credit Facility will also
require the Company to maintain certain financial ratios including: (a) minimum
EBITDA (as defined in the New Credit Facility) of $22.5 million in each of 1997
and 1998, $25.5 million in each of 1999 and 2000 and $28.0 million in 2001; and
(b) under certain
10
<PAGE> 13
circumstances, a minimum fixed charge coverage ratio. All of these restrictive
covenants may restrict the Company's ability to expand or to pursue its business
strategies. The ability of the Company to comply with these and other provisions
of the New Credit Facility may be affected by changes in economic or business
conditions, results of operations or other events beyond the Company's control.
The breach of any of these covenants could result in a default under the New
Credit Facility, in which case, depending on the actions taken by the lenders
thereunder or their successors or assignees, such lenders could elect to declare
all amounts borrowed under the New Credit Facility, together with accrued
interest, to be due and payable, and the Company could be prohibited from making
payments of interest and principal on the Notes until the default is cured or
all such indebtedness is paid or satisfied in full. If the Company were unable
to repay such borrowings, such lenders could proceed against the collateral
granted to them to secure that indebtedness, which indebtedness will be secured
by liens on substantially all the inventory and accounts receivable of the
Company. In addition, the New Credit Facility contains certain events of default
which are substantially similar to the events of default under the Indenture
except as follows: (i) the Company's failure to pay other indebtedness or
judgments entered against the Company will trigger a cross-default under the New
Credit Facility at lower dollar amounts than in the Indenture; (ii) the creation
of liens on or failure of any security interest in collateral securing the New
Credit Facility will trigger a default under the New Credit Facility; (iii) the
insolvency or dissolution of the Company will trigger a default under the New
Credit Facility; (iv) a Change of Control that triggers the Company's repurchase
obligations under the Indenture will trigger a default under the New Credit
Facility; (v) payment by the Company with respect to certain pending legal
proceedings of more than $5.0 million in excess of the Company's reserve for
such liabilities will trigger an event of default under the New Credit Facility;
and (vi) the occurrence of certain events (such as damage or loss of property,
labor strikes or acts of God) causing a material adverse change in the Company's
business could trigger a default under the New Credit Facility. If the
indebtedness under the New Credit Facility were to be accelerated, there can be
no assurance that the assets of the Company would be sufficient to repay in full
such indebtedness and the other indebtedness of the Company, including the
Notes. See "Description of New Credit Facility" and "Description of the
Notes -- Ranking." The Company anticipates that a combination of funds generated
from operations and significant additional borrowings under the New Credit
Facility will be required to finance the planned program of upgrading Chief's
store network by opening new stores and relocating or expanding certain existing
stores. The Company is unable at this time to determine the dollar amount to be
borrowed under the New Credit Facility for such purposes. If for any reason the
Company were unable to satisfy the conditions to borrowing under the New Credit
Facility and to make additional borrowings thereunder, the Company would not
have sufficient funds to continue such upgrade of the store network and to meet
its other payment obligations. See "-- Ability to Continue Company Growth."
CONCENTRATION OF OWNERSHIP
Following the Recapitalization, The Principal Fund and its affiliates, TCW
Special Credits Fund IV, TCW Special Credits Plus Fund, TCW Special Credits
Trust IV and TCW Special Credits Trust IVA, all of which are affiliates of The
TCW Group, Inc., will control the power to vote approximately 86.2% of the
outstanding Common Stock of the Company. Accordingly, The Principal Fund and its
affiliates are entitled to elect all directors of the Company, approve all
amendments to the Company's Certificate of Incorporation and effect fundamental
corporate transactions such as mergers and asset sales. See "Principal
Stockholders."
CHANGE OF CONTROL
A Change of Control could require the Company to refinance substantial
amounts of indebtedness. Upon the occurrence of a Change of Control, the holders
of the Notes would be entitled to require the Company to purchase the Notes at a
purchase price equal to 101% of the principal amount of such Notes, plus accrued
and unpaid interest, if any, to the date of repurchase. However, the New Credit
Facility will prohibit the purchase of the Notes by the Company in the event of
a Change of Control, unless and until such time as the indebtedness under the
New Credit Facility is repaid in full. The Company's failure to purchase the
Notes would result in a default under the Indenture and the New Credit Facility
which could permit the trustee under the Indenture, the holders of at least 25%
in principal amount of the outstanding Notes or the lenders under the New Credit
Facility to declare the principal and accrued but unpaid interest to be due and
payable. The inability to repay the indebtedness under the New Credit Facility,
if accelerated, would also constitute an event of default under the Indenture,
which could have adverse consequences to the Company and the holders of the
Notes because such a
11
<PAGE> 14
default could cause an acceleration of the indebtedness under the Indenture. In
the event of a Change of Control, there can be no assurance that the Company
would have either (i) the ability to refinance the New Credit Facility or (ii)
sufficient assets to satisfy all of its obligations under the New Credit
Facility and the Notes. See "Description of New Credit Facility" and
"Description of the Notes -- Change of Control."
DECLINE IN COMPARABLE STORE SALES
The Company's comparable store sales declined 2.6% in fiscal 1996. Although
the Company believes that comparable store sales declines resulted primarily
from disruptions caused by the Company's intensive remodeling efforts and the
opening of additional Company stores in close proximity to existing store
locations in an effort to further penetrate certain markets, there can be no
assurance that comparable store sales will not continue to decline in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent upon the
abilities and experience of its senior management team, particularly David H.
Eisenberg, the President and Chief Executive Officer of the Company. The loss of
the services of Mr. Eisenberg without a suitable replacement could have a
material adverse effect on the Company's business and future operations. The
Company does not maintain key man life insurance with respect to any of its
executive officers. The Company has employment agreements with Mr. Eisenberg and
Larry L. Buresh, the Vice President -- Information Systems of the Company, that
extend through 1999 and 1998, respectively. See "Management -- Employment
Arrangements."
DEPENDENCE ON VENDOR RELATIONSHIPS
The Company's business is dependent upon developing and maintaining close
relationships with its vendors and its ability to purchase products from these
vendors on favorable price and other terms, including obtaining financial
incentives, such as cooperative advertising arrangements and other marketing
incentive programs, and non-financial benefits such as improved packaging and
distribution accommodations. In fiscal 1996, the Company purchased approximately
13.7% of its products from Echlin, Inc., a supplier of ignition parts, fuel
pumps, brakes and brake parts and purchased approximately 10.5% of its products
from GNB Incorporated, a supplier of batteries. The Company does not have
written agreements with either Echlin, Inc. or GNB Incorporated. A disruption of
these or other vendor relationships, or a material reduction in any of the
advertising, incentive or other programs, could have a material adverse effect
on the Company's business. The Company believes that alternative sources of
supply could be obtained for all of its products, if necessary, on generally
comparable terms, but no assurance can be given in this regard. See
"Business -- Purchasing."
COMPETITION
The market for the retail sale of automotive parts and accessories is
highly fragmented and highly competitive. The Company competes primarily with
national and regional automotive parts chains, wholesalers or jobber stores
(some of which are associated with national automotive parts distributors or
associations), automobile dealers that supply manufacturer parts and mass
merchandisers that carry automotive replacement parts and accessories. As the
Company enters the commercial market, it faces additional competition from
wholesalers and jobber stores in particular. Furthermore, in light of the trend
in the automotive parts industry toward increasing consolidation at the
warehouse and jobber levels, the Company's financial performance may be
significantly affected by the Company's ability to compete successfully for
associated commercial customers, and otherwise take advantage of consolidation
opportunities and other industry trends. Many of the Company's competitors are
larger in terms of sales volume and have greater financial resources. See
"Business -- Competition."
DEMAND; ECONOMIC AND WEATHER CONDITIONS; GEOGRAPHIC CONCENTRATION
The demand for automotive products is affected by a number of factors
beyond the Company's control, including improvement of vehicle quality, U.S.
economic conditions and weather conditions. In recent years, there have been,
and in the future there are likely to continue to be, significant improvements
in the quality and complexity of new vehicles and vehicle parts, which may
reduce the demand for DIY repair parts. In addition,
12
<PAGE> 15
approximately 24% of the Company's stores are located in Texas and 70% are
located in California, and an even higher percentage of the Company's EBITDA is
derived from California. A majority of the Company's business is likely to
remain concentrated in these regions. As a result, the Company's business is
sensitive to the economic and weather conditions of those regions. In recent
years, certain parts of those regions have experienced economic recessions and
extreme weather conditions. California, in particular, in recent years has
experienced adverse economic conditions and has suffered from numerous natural
disasters. While adverse weather conditions such as temperature extremes may
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. No prediction can be made as to future
economic or weather conditions in these or the other regions in which the
Company operates.
FRAUDULENT CONVEYANCE RISKS
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Notes in
favor of other existing or future creditors of the Company.
Proceeds from the Offering are being used, in part, in a distribution to
the Company's stockholders. If a court in a lawsuit on behalf of any unpaid
creditor of the Company or a representative of the Company's creditors were to
find that, at the time the Company issued the Notes, the Company (x) intended to
hinder, delay or defraud any existing or future creditor or contemplated
insolvency with a design to prefer one or more creditors to the exclusion in
whole or in part of others or (y) did not receive fair consideration in good
faith or reasonably equivalent value for issuing the Notes and the Company (i)
was insolvent, (ii) was rendered insolvent by reason of such distribution, (iii)
was engaged or about to engage in business or transactions for which its
remaining assets constituted unreasonably small capital to carry on its
business, or (iv) intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they matured, such court could avoid the
Notes and avoid such transactions. Alternatively, in such event, claims of the
holders of Notes could be subordinated to claims of other creditors of the
Company. The Company may be viewed as insolvent at the time of or as a result of
the Recapitalization if the fair market value of its assets does not exceed its
probable liabilities at the time of, or following, the Recapitalization.
Based upon financial and other information currently available to it,
management of the Company believes that the Notes are being incurred for proper
purposes and in good faith. Certain courts have held, however, that a company's
purchase of its own capital stock does not constitute reasonably equivalent
value or fair consideration for incurring indebtedness. By extension, the
Recapitalization may also be viewed as not constituting reasonably equivalent
value or fair consideration to the Company. The Company believes that it (i) is
solvent and will continue to be solvent after issuing the Notes, because the
Company believes the fair value of the Company's assets exceeds and will exceed
its probable liabilities, (ii) will have sufficient capital for carrying on the
business it intends to conduct after such issuance, and (iii) will be able to
pay its debts as they mature. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity, Capital Resources
and Financial Condition." There can be no assurance, however, that a court would
concur with such beliefs and positions.
Additionally, under federal bankruptcy or applicable state solvency law, if
a bankruptcy or insolvency were initiated by or against the Company within 90
days after any payment by the Company with respect to the Notes, or within one
year after any payment to any insider of the Company, (which will include the
distribution made in the Recapitalization), or if the Company anticipated
becoming insolvent at the time of any such payment, all or a portion of the
payment could be avoided as a preferential transfer and the recipient of such
payment could be required to return such payment. In rendering its opinion on
the validity of the Notes, neither counsel for the Company, nor counsel for the
Underwriters, nor any other counsel, will express any opinion as to federal or
state laws relating to fraudulent transfers, which means the holders of the
Notes have no independent legal verification that the Notes or payments on the
Notes will not be treated as a fraudulent conveyance or preferential transfers,
respectively, by a court if the Company were to become insolvent.
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 battery recycling and used oil and oil filters, and regarding
13
<PAGE> 16
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. The Company also
currently provides a recycling program for the collection of used oil and oil
filters at certain of its stores as a service to its customers pursuant to
agreements with third party vendors. In addition, the Company collects and
temporarily holds battery cores pursuant to an agreement with the Company's
battery vendor. Pursuant to these agreements, the used oil and oil filters and
battery cores are collected by Company employees, deposited into vendor-supplied
containers/pallets and then disposed of by the third-party vendors. To date,
compliance with applicable laws and regulations has not had a material effect on
the Company's results of operations and financial condition. However,
environmental laws have changed rapidly in recent years, and the Company may be
subject to more stringent environmental laws in the future. There can be no
assurance that more stringent environmental laws would not have an adverse
effect on the Company's results of operations.
In addition, 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. Compliance with such laws and regulations has not
had a material impact on the Company's 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. The Company is also
indemnified by The Southland Corporation ("Southland") against losses associated
with any environmental contamination existing on the date of the sale of the
Company by Southland. See "Business -- History" and "-- Environmental Matters."
ABILITY TO CONTINUE COMPANY GROWTH
The Company has grown in recent years by opening new stores, remodeling and
relocating existing stores and increasing the number of SKUs available in
existing stores. There can be no assurance that the Company will continue to be
able to maintain or expand its market presence in its current locations or to
successfully enter other markets. The ability of the Company to continue to grow
in the future will depend on a number of factors including existing and emerging
competition, the availability of working capital to support such growth, the
Company's ability to manage costs and maintain margins in the face of pricing
pressures and the ability to recruit and train additional qualified personnel.
Failure by the Company to maintain its growth could have an adverse effect on
its ability to make payments of interest and principal on the Notes.
IMPLEMENTATION AND INTEGRATION OF MANAGEMENT INFORMATION SYSTEMS
The Company is in the process of implementing new information systems which
management believes will assist the Company in reducing labor costs, enhancing
productivity and improving inventory and merchandising management. The Company's
future success may be dependent to a significant degree upon the implementation,
accuracy and proper utilization of its management information systems. For
example, the Company's ability to manage its inventories and to price its
products appropriately depends upon the quality and effective use of the
information generated by its management information systems. The Company
estimates that the planned implementation and integration of its management
information systems will cost approximately $1.6 million during 1997 and an
aggregate of approximately $19.6 million over the next five years. The failure
of the Company's management information systems to adapt to business needs
resulting from, among other things, expansion of its store network, introduction
of new products and the continued growth of its business, or the failure of the
Company to successfully finance or implement these systems, could have a
material adverse effect on the Company.
LACK OF PUBLIC MARKET FOR THE NOTES
There is no existing trading market for the Notes, and there can be no
assurance regarding the future development of a market for the Notes or the
ability of holders of the Notes to sell their Notes or the price at which such
holders may be able to sell their Notes. If such a market were to develop, the
Notes could trade at prices that may be higher or lower than the initial
offering price depending on many factors, including prevailing interest rates,
the Company's operating results and the market for similar securities. The
Underwriters have advised the Company that they currently intend to make a
market in the Notes. The Underwriters are not
14
<PAGE> 17
obligated to do so, however, and any market-making with respect to the Notes may
be discontinued at any time without notice. Therefore, there can be no assurance
as to the liquidity of any trading market for the Notes or that an active market
for the Notes will develop. The Company does not intend to apply for listing or
quotation of the Notes on any securities exchange or stock market.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the Notes will not be
subject to similar disruptions. Any such disruptions may have an adverse effect
on holders of the Notes.
THE RECAPITALIZATION
In connection with the Offering, the Company and its stockholders will
effect a series of transactions that will result in the Recapitalization of the
Company. The elements of the Recapitalization consist of (i) the completion of
the Offering (estimated to result in approximately $125.5 million of net
proceeds), (ii) the exercise of outstanding options to purchase 4,839.97 shares
of Common Stock by management for aggregate proceeds of $6.9 million, (iii) the
repayment by members of management of approximately $910,000, a portion of the
amounts owed to the Company under certain promissory notes, (iv) the
establishment of the New Credit Facility, which will provide for $100.0 million
of revolving credit facilities, $10.7 million of which will initially be
borrowed by the Company, and (v) the application of the aggregate net proceeds
from the foregoing as described under "Use of Proceeds." Consummation of each of
the foregoing transactions is subject to the simultaneous consummation or
effectiveness, as applicable, of each of the other elements of the
Recapitalization. See "Use of Proceeds," "Benefits to Related Parties," "Certain
Transactions" and "Description of New Credit Facility."
USE OF PROCEEDS
The net proceeds from the sale of the Notes are estimated to be
approximately $125.5 million (after deduction of discounts to the Underwriters
and other expenses). The Company intends to use the aggregate net proceeds from
the Recapitalization (i) to repay all outstanding indebtedness (approximately
$65.0 million) under the Existing Credit Facility which bears interest at a
variable rate, which was 6.7% at March 30, 1997, and expires in June 1999, (ii)
to pay certain employees of the Company an aggregate of $4.0 million for
previously accrued employee incentive compensation and (iii) to distribute
approximately $75.0 million to the stockholders of the Company (consisting of
approximately $64.2 million to The Principal Fund and its affiliates as a
partial return of their investment and $10.8 million to management stockholders,
of which approximately $7.8 million will be used by certain management
stockholders to exercise options and repay certain loans made in connection with
prior purchases of Common Stock and the remainder of which will be a partial
return of their initial investment).
BENEFITS TO RELATED PARTIES
The Principal Fund, its affiliates and certain management stockholders will
receive an aggregate of $75.0 million in the Recapitalization. Approximately
$6.9 million of such $75.0 million will be used by management stockholders to
exercise their outstanding options to purchase 4,839.97 shares of the Common
Stock of the Company. Approximately $910,000 of such $75.0 million will be used
by management stockholders to repay a portion of amounts owed to the Company
under certain promissory notes. Approximately $64.2 million and approximately
$3.0 million will be distributed to The Principal Fund and its affiliates, and
to management stockholders, respectively, as a partial return of such
stockholders' investment in Chief. These payments are the first dividend or
return of investment that the stockholders have received since the time of The
Principal Fund's investment in the Company in June 1994. The Principal Fund's
investment significantly deleveraged the Company at a time when management
needed a flexible capital structure in order to implement its plan to reposition
Chief as a full-line auto parts and accessories chain. Because the Company has
substantially completed its program of repositioning Chief, the Company has
decided to provide its stockholders with a partial return of their initial
investment in Chief.
15
<PAGE> 18
The estimated sources and uses of funds expected as of the closing of the
Recapitalization are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Sources of funds:
Gross proceeds from the Offering.......................... $130,000
Exercise of options....................................... 6,871
Repayment of management promissory notes.................. 910
Borrowings under New Credit Facility...................... 10,689
--------
Total............................................. $148,470
--------
Uses of funds:
Repayment of Existing Credit Facility..................... $ 65,000
Employee incentive compensation........................... 4,000
Distribution to stockholders as partial return of
investment............................................. 67,219
Distribution to stockholders to be used to exercise
options................................................ 6,871
Distribution to stockholders to be used to repay
management promissory notes............................ 910
Fees and expenses of the Offering......................... 4,470
--------
Total............................................. $148,470
--------
</TABLE>
CAPITALIZATION
The following table sets forth the unaudited cash and cash equivalents and
the capitalization of the Company at March 30, 1997 and as adjusted for the
Recapitalization, as described under "The Recapitalization," "Use of Proceeds"
and "Benefits to Related Parties." This table should be read in conjunction with
the "Selected Financial and Other Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 30, 1997
----------------------
AS
ACTUAL ADJUSTED
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,138 $ 1,138
======== ========
Long-term debt (including current portion):
Existing Credit Facility.................................. $ 61,100 $ --
New Credit Facility....................................... -- 7,186
Industrial development bonds.............................. 1,870 1,870
Senior Notes Due 2005..................................... -- 130,000
Capital lease obligations................................. 18,652 18,652
-------- --------
Total debt.................................................. 81,622 157,708
-------- --------
Stockholders' equity:
Common Stock, par value $0.01 per share; 100,000 shares
authorized; 49,898.31 shares issued and outstanding,
actual; 54,738.28 shares issued and outstanding, as
adjusted............................................... 1 1
Additional paid-in capital................................ 70,815 4,402
Less: management notes receivable......................... (1,821) (911)
Retained earnings......................................... 2,655 --
-------- --------
Total stockholders' equity.................................. 71,650 3,492
-------- --------
Total capitalization........................................ $153,272 $161,200
======== ========
</TABLE>
16
<PAGE> 19
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data of the
Company for the five fiscal years ended December 29, 1996 and for the three
months ended March 31, 1996 and March 30, 1997. The historical financial data
for the five fiscal years ended December 29, 1996 were derived from the
Company's audited Financial Statements, appearing elsewhere in this Prospectus.
The historical financial data for the three months ended March 31, 1996 and
March 30, 1997 were derived from the Company's unaudited Financial Statements
that have been prepared on the same basis as the audited Financial Statements
and include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary for a fair presentation of the financial position
and results of operations for such periods. Operating results for the three
months ended March 30, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 28, 1997. The Company's fiscal year
is the 52- or 53-week period ending on the last Sunday in December. All fiscal
years presented are 52 weeks, except fiscal 1995, which is 53 weeks. In
addition, the results of operations subsequent to the Merger are not comparable
to the results prior to the Merger due to certain purchase accounting
adjustments. The following table should be read in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Financial Statements appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR (A) SUCCESSOR (A)
------------------------------ ----------------------------------------------------
SIX SIX THREE MONTHS
YEARS ENDED MONTHS MONTHS YEARS ENDED ENDED
------------------- ENDED ENDED ------------------- -------------------
DEC. 27, DEC. 26, JUNE 26, DEC. 25, DEC. 31, DEC. 29, MAR. 31, MAR. 30,
1992 1993 1994 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER STORE SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $371,347 $374,618 $195,286 $203,878 $429,047 $438,182 $102,260 $109,854
Cost of goods sold, warehousing and
distribution(b).................... 233,696 224,543 114,452 133,390 251,628 251,764 58,579 63,281
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit(b)...................... 137,651 150,075 80,834 70,488 177,419 186,418 43,681 46,573
Selling, general and administrative
expenses(c)........................ 148,498 131,125 68,642 70,500 145,829 167,064 36,485 41,017
Depreciation and amortization........ 11,743 7,523 3,626 5,020 10,397 11,622 2,666 3,251
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)(b)(c)........ (22,590) 11,427 8,566 (5,032) 21,193 7,732 4,530 2,305
Interest expense, net................ 12,024 12,014 5,807 2,533 6,009 6,203 1,440 1,784
Other (expense) income, net.......... 1,956 1,183 41 4 (205) (66) (65) (10)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes.... (32,658) 596 2,800 (7,561) 14,979 1,463 3,025 511
Income tax expense (benefit)......... (438) 370 1,383 537 5,500 359 1,353 341
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)(b)(c).............. $(32,220) $ 226 $ 1,417 $ (8,098) $ 9,479 $ 1,104 $ 1,672 $ 170
======== ======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............ $ 885 $ 1,095 $ 1,116 $ 1,133 $ 1,202 $ 1,140 $ 1,224 $ 1,138
Working capital (deficit)............ (20,088) (21,705) (26,075) 17,484 23,961 47,987 26,820 47,843
Total assets......................... 147,863 148,189 151,414 229,659 254,419 298,348 269,592 299,472
Total debt, including current
maturities(d)...................... 117,876 117,935 108,422 61,130 63,471 81,986 66,549 81,622
Stockholders' equity (deficit)(e).... (49,395) (48,820) (47,303) 60,646 70,275 71,480 71,948 71,650
SELECTED ADDITIONAL OPERATING DATA:
Average net sales per store(i)....... $ 727 $ 759 $ 397 $ 413 $ 845 $ 824 $ 195 $ 201
Average net sales per store square
foot(i)............................ $ 220 $ 229 $ 118 $ 121 $ 242 $ 223 $ 54 $ 52
Percentage change in comparable store
net sales(j)....................... 4.5% 1.8% 6.0% 3.9% 1.8% (2.6)% (2.7)% 2.0%
OTHER DATA:
EBITDA(f)............................ $ (1,407) $ 20,133 $ 12,233 $ 12,869 $ 31,385 $ 33,288 $ 7,131 $ 5,546
EBITDA margin(g)..................... (0.4)% 5.4% 6.3% 6.3% 7.3% 7.6% 7.0% 5.0%
Gross margin......................... 37.1% 40.1% 41.4% 34.6% 41.3% 42.5% 42.7% 42.4%
Capital expenditures................. $ 6,100 $ 6,178 $ 5,885 $ 6,512 $ 11,822 $ 23,275 $ 4,398 $ 3,536
Ratio of earnings to fixed
charges(h)......................... (h) 1.0x 1.3x (h) 2.0x 1.1x 1.8x 1.1x
Cash provided by (used in):
Operating activities............... $ 2,976 $ 5,205 $ 13,241 $ 9,854 $ 9,089 $ 1,864 $ 1,354 $ 3,609
Investing activities............... (2,101) (4,579) (3,663) (25,172) (11,673) (22,405) (4,271) (3,193)
Financing activities............... (984) (416) (9,557) 12,812 2,653 20,479 2,939 (418)
PRO FORMA DATA:
Interest expense, net (historical)... $ 6,203 $ 1,784
Interest expense, net................ 17,711 4,563
Cash interest expense(k)............. 16,752 4,323
Ratio of total debt to
EBITDA(k)(l)....................... 4.7x (m)
Ratio of EBITDA to cash interest
expense(k)(l)...................... 2.0x 1.3x
Ratio of earnings to fixed
charges(h)......................... (h) (h)
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
PREDECESSOR (A) SUCCESSOR (A)
------------------------------ ----------------------------------------------------
SIX SIX THREE MONTHS
YEARS ENDED MONTHS MONTHS YEARS ENDED ENDED
------------------- ENDED ENDED ------------------- -------------------
DEC. 27, DEC. 26, JUNE 26, DEC. 25, DEC. 31, DEC. 29, MAR. 31, MAR. 30,
1992 1993 1994 1994 (B) 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER STORE SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED STORE DATA:
Beginning stores..................... 526 495 492 493 495 520 520 544
New stores........................... 2 14 9 9 34 51 12 5
Relocated stores..................... 2 1 4 2 3 12 2 2
Closed stores (including
relocated)......................... (35) (18) (12) (9) (12) (39) (4) (4)
-------- -------- -------- -------- -------- -------- -------- --------
Ending stores.................. 495 492 493 495 520 544 530 547
======== ======== ======== ======== ======== ======== ======== ========
Remodeled stores..................... 25 29 13 25 90 159 91 18
Average square footage per
store(i)........................... 3,312 3,321 3,362 3,408 3,489 3,695 3,589 3,853
Total square footage at period end
(in thousands)(i).................. 1,639 1,639 1,673 1,694 1,848 2,084 1,921 2,120
</TABLE>
- ---------------
(a) "Successor" refers to Chief Auto Parts Inc. subsequent to the Merger;
"Predecessor" refers to Chief Auto Parts Inc. prior to the Merger. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Pro Forma 1994 Information" for further information regarding
the Merger.
(b) Year ended December 27, 1992 includes a $6.7 million non-cash provision
related to discontinued inventory. Six months ended December 25, 1994
includes a $12.9 million Merger-related inventory charge.
(c) Year ended December 27, 1992 includes a $7.5 million non-cash provision
primarily related to the Company's exit from the Nashville and Phoenix
markets and a $3.5 million non-cash provision related to various insurance
reserves. Year ended December 29, 1996 includes a $14.0 million non-cash
provision for (i) store closings primarily related to the Company's exit
from the Little Rock market and (ii) legal reserves.
(d) Total debt comprises long-term borrowings and capital leases.
(e) No cash dividends have been paid during the presented periods.
(f) EBITDA represents income (loss) before interest expense (net), income
taxes, depreciation and amortization and, (i) in year ended December 27,
1992, excludes a $7.5 million non-cash provision primarily related to the
Company's exit from the Nashville and Phoenix markets, (ii) in six months
ended December 25, 1994, excludes a $12.9 million Merger-related inventory
charge, (iii) in year ended December 29, 1996, excludes a $14.0 million
non-cash provision for (A) store closings primarily related to the
Company's exit from the Little Rock market and (B) legal reserves and (iv)
in the three months ended March 30, 1997 includes $1.9 million of expenses
related to the launch of "The All New Chief" campaign in the Los Angeles,
California market (excluding such expenses, EBITDA for such period would
have been $7.4 million). EBITDA is used by the Company for the purpose of
analyzing operating performance, leverage and liquidity. Such data are not
a measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to
cash flows as a measure of liquidity.
(g) EBITDA margin represents EBITDA as a percentage of net sales. EBITDA margin
for the three months ended March 30, 1997 includes expenses related to the
launch of "The All New Chief" campaign in the Los Angeles, California
market. Excluding such expenses, EBITDA margin for such period would have
been 6.7%.
(h) The ratio of earnings to fixed charges is computed by aggregating income
before income taxes and fixed charges and dividing the total by fixed
charges. Fixed charges comprise interest on all indebtedness including
capital leases and amortization of debt expense, and one-third of rental
expense (being that portion of rental expense representative of an interest
factor). During the year ended December 27, 1992 and the six months ended
December 25, 1994, earnings were insufficient to cover fixed charges by
$32.7 million and $7.6 million, respectively, and accordingly such ratios
are not presented. The pro forma ratio of earnings to fixed charges gives
effect to the Recapitalization as if it had occurred on January 1, 1996. On
a pro forma basis, during the year ended December 29, 1996, earnings were
insufficient to cover fixed charges by $10.2 million, and accordingly such
ratio is not presented. On a pro forma basis, during the three months
18
<PAGE> 21
ended March 30, 1997, earnings were insufficient to cover fixed charges by
$2.3 million, and accordingly such ratio is not presented.
(i) Average net sales per store, average square footage per store and average
net sales per store square foot are based on the average of the 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. Total square footage at period end is based on the Company's
actual store formats and includes normal selling, office, stockroom and
receiving space.
(j) The percentage change in comparable store net sales is calculated as the
net change in sales for each comparable store for the equivalent period in
the prior year. Comparable stores are stores that have been operating for
more than 12 months since first opening. During the 13th month of
operations, new stores are considered comparable stores. Stores which have
been relocated are treated as comparable stores. Closed stores are not
categorized as comparable stores.
(k) Pro forma cash interest expense for the year ended December 29, 1996 and
the three months ended March 30, 1997 is pro forma interest expense, net of
amortization of deferred financing costs, and gives effect to the
Recapitalization as if it had occurred on January 1, 1996 and December 30,
1996, respectively, assuming a composite interest rate of 7.5% on the New
Credit Facility. No interest income has been assumed on average excess cash
invested of approximately $5.3 million during year ended December 29, 1996.
(l) Ratios concerning EBITDA are included as they are generally recognized as
providing useful information regarding a company's ability to service
and/or incur debt. Such ratios are also relevant for covenant analysis
under the Indenture.
(m) This ratio is not presented for the three months ended March 30, 1997
because the Company believes the ratio of total debt to EBITDA, in which
total debt is compared to quarterly EBITDA, is not an accurate or meaningful
representation of full year results.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial and Other Data" and the Financial Statements of the Company and the
related notes thereto included elsewhere in this Prospectus. This Prospectus
contains, in addition to historical information, forward-looking statements that
include risks and other uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements. Factors
that might cause such a difference include those discussed below, as well as
general economic and business conditions, competition and other factors
discussed elsewhere in this Prospectus.
GENERAL
Management has repositioned Chief from a chain of smaller automotive parts
convenience stores to a full-line auto parts and accessories chain through a
number of initiatives designed to promote the Company's image as a premier
retailer for the DIY market. Since the Merger, the Company has invested
approximately $45.1 million in total capital expenditures, doubled the average
number of SKUs in its stores and either remodeled or opened as new stores 74% of
its current stores:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH
------------------ -------------
1994 1995 1996 1996 1997
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Stores at beginning of period............................... 492 495 520 520 544
New stores.................................................. 18 34 51 12 5
Relocated stores............................................ 6 3 12 2 2
Closed stores (including relocated stores).................. (21) (12) (39) (4) (4)
--- --- --- ---- ----
Stores at end of period................................... 495 520 544 530 547
=== === === ==== ====
Remodeled or expanded stores................................ 38 90 159 91 18
=== === === ==== ====
</TABLE>
Newly-opened stores are categorized as new stores during the first full
year of operations. During the 13th month of operations, new stores are
considered comparable stores. Stores that have been relocated are treated as
comparable stores. Closed stores (including those closed during the current
year) are not categorized as comparable stores. The percentage change in
comparable store sales is calculated as the net change in sales for each
comparable store for the equivalent period in the prior year.
As described in Notes 1 and 2 to the Financial Statements, the Company was
the surviving corporation of the Merger effective June 27, 1994. The Merger was
accounted for by the purchase method of accounting, and accordingly, the assets
and liabilities of the Predecessor were revalued and significant adjustments to
the assets acquired and liabilities assumed were made to reflect their estimated
fair values at the date of the Merger. As a result of these factors, management
does not believe the financial statements of the Company are comparable to those
of the Predecessor. A comparison follows between the Company's results for the
years ended December 29, 1996 and December 31, 1995, and the pro forma combined
results of the Company and the Predecessor for the year ended December 25, 1994
(which assumes that the Merger occurred on December 27, 1993). The pro forma
results for 1994 combine the results of operations of the Company for the six
months ended December 25, 1994 and of the Predecessor for the six months ended
June 26, 1994 (as derived from the Financial Statements of the Company and the
Predecessor, included elsewhere in this Prospectus), and pro forma Merger
adjustments.
In order to make the following comparisons meaningful, it should be noted
that fiscal 1996 included 52 weeks, fiscal 1995 included 53 weeks and pro forma
fiscal 1994 included 52 weeks.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items included in Chief's Financial
Statements.
20
<PAGE> 23
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------------------------------------
PRO
FORMA THREE MONTHS ENDED THREE MONTHS ENDED
1994 1995 1996 MARCH 31, 1996 MARCH 30, 1997
--------- ----- ----- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold,
warehousing and
distribution..... 62.1 58.7 57.5 57.3 57.6
----- ----- ----- ------ ------
Gross profit........ 37.9 41.3 42.5 42.7 42.4
Selling, general and
administrative... 34.8 34.0 38.1 35.7 37.3
Depreciation and
amortization..... 2.3 2.4 2.6 2.6 3.0
----- ----- ----- ------ ------
Operating income.... 0.8 4.9 1.8 4.4 2.1
===== ===== ===== ====== ======
OTHER DATA:
EBITDA(a)........... 6.3 7.3 7.6 7.0 5.0
===== ===== ===== ====== ======
</TABLE>
- ---------------
(a) As defined in note (f) to the Summary Financial and Other Data table.
Three Months Ended March 30, 1997 vs. Three Months Ended March 31, 1996
Net sales. Net sales increased by $7.6 million, or 7.4%, to $109.9 million
in the first quarter of 1997 from $102.3 million in the first quarter of 1996.
The increase was due primarily to growth in the Company's store base, as well as
a 2.0% increase in comparable store sales.
Gross profit. Gross profit increased by $2.9 million, or 6.6%, to $46.6
million in the first quarter of 1997 from $43.7 million in the first quarter of
1996, primarily as a result of sales volume increases. Gross profit margin
decreased slightly due to higher markdowns and sales discounts in the first
quarter of 1997 compared to the first quarter of 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $4.5 million, or 12.4%, to $41.0 million in
the first quarter of 1997 from $36.5 million in the first quarter of 1996. This
increase was primarily due to (i) higher occupancy costs resulting from an
increase in the number of stores open and (ii) additional advertising costs of
$1.4 million, or 1.3% of net sales, and additional labor costs of $500,000, or
0.5% of net sales, associated with the launch of "The All New Chief" program in
the Los Angeles, California market. Excluding $1.9 million of expenses
associated with "The All New Chief" program, selling, general and administrative
expenses as a percentage of net sales decreased to 35.5% in the first quarter of
1997 from 35.7% in the first quarter of 1996.
The "All New Chief" program is comprised of an institutional advertising
program broadcast in the Los Angeles market and additional staffing at stores in
that market. The program is designed to emphasize the extensive remodeling of
stores in that market, the related additional inventory and additional store
staffing to better serve customers.
EBITDA. EBITDA decreased by $1.6 million, or 22.2%, to $5.5 million in the
first quarter of 1997 from $7.1 million in the first quarter of 1996. Excluding
expenses associated with "The All New Chief" program, EBITDA increased by
$315,000, or 4.4%, to $7.4 million in the first quarter of 1997 from $7.1
million in the first quarter of 1996 and the EBITDA margin decreased to 6.7% in
the first quarter of 1997 from 7.0% in the first quarter of 1996.
Depreciation and amortization expense. Depreciation and amortization
expense increased by $585,000, or 21.9%, to $3.3 million in the first quarter of
1997 from $2.7 million in the first quarter of 1996. This increase was primarily
due to an increase in the depreciable asset base, including leasehold
improvements and furniture and
21
<PAGE> 24
equipment, resulting from extensive store remodeling throughout fiscal 1996, as
well as to an increase in the number of stores open.
Interest expense. Interest expense increased by $344,000, or 23.9%, to $1.8
million in the first quarter of 1997 from $1.4 million in the first quarter of
1996. This increase was due to higher average outstanding balances under the
Existing Credit Facility in the first quarter of 1997 compared to the first
quarter of 1996.
Net income. Net income decreased by $1.5 million, or 89.8%, to $170,000 in
the first quarter of 1997 from $1.7 million in the first quarter of 1996. This
decrease was primarily due to higher occupancy costs resulting from an increase
in the number of stores open and to additional advertising and labor costs
associated with the launch of "The All New Chief" program in the Los Angeles,
California market.
Fiscal Year Ended December 29, 1996 vs. Fiscal Year Ended December 31, 1995
Net sales. Net sales increased by $9.1 million, or 2.1%, to $438.2 million
in fiscal 1996 from $429.0 million in fiscal 1995. The increase was primarily
attributable to higher new store sales in fiscal 1996 compared to fiscal 1995
(63 stores were opened in fiscal 1996 compared to 37 in fiscal 1995). The
increase in new store sales offset a decrease in comparable store sales during
fiscal 1996. Additionally, fiscal 1995 consisted of 53 weeks compared to 52
weeks in fiscal 1996; the additional one week's sales of $7.4 million in fiscal
1995 had no equivalent in fiscal 1996. On a comparable basis (52 weeks compared
to 52 weeks), comparable store sales during fiscal 1996 decreased by $10.6
million, or 2.6%, to $394.3 million in fiscal 1996 from $404.9 million in fiscal
1995. The comparable store sales decrease resulted from a lower average number
of customer transactions per store, which was partially offset by a higher
average value of customer transaction size (as measured in dollars). Management
believes that the reduction in customer transactions was attributable to
disruptions caused by extensive remodeling efforts during fiscal 1996 (159
stores were remodeled in fiscal 1996 compared to 90 in fiscal 1995), as well as
to the opening of new stores in close proximity to existing stores in an effort
to extend market penetration.
Gross profit. Gross profit increased by $9.0 million, or 5.1%, to $186.4
million in fiscal 1996 from $177.4 million in fiscal 1995 due to the increased
sales volume and a higher gross profit margin (42.5% in fiscal 1996 compared to
41.3% in fiscal 1995). The gross profit margin increase resulted from product
mix enhancements, improved purchasing terms from primary vendors and additional
purchasing incentives provided by vendors due to remodeling and new store
openings.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $21.2 million, or 14.6%, to $167.1 million
in fiscal 1996 from $145.8 million in fiscal 1995. This increase was primarily
due to an unusual $14.0 million non-cash provision for (i) store closings
primarily related to the Company's exit from the Little Rock market and (ii)
legal reserves. The remainder of the increase was due to an increase in sales
volume and a corresponding increase in related expenses such as store labor,
advertising, and occupancy costs. As a percentage of net sales, excluding the
unusual $14.0 million non-cash provision, selling, general and administrative
expenses increased to 34.9% in fiscal 1996 from 34.0% in fiscal 1995. This 0.9%
increase was primarily attributable to expenses associated with new store
openings, additional store labor entailed in remerchandising the remodeled
stores, higher store supply expense and additional advertising promotions.
EBITDA. EBITDA increased by $1.9 million, or 6.1%, to $33.3 million in
fiscal 1996 (52 weeks) from $31.4 million in fiscal 1995 (53 weeks). The
increase was principally the result of the increased sales volume and gross
profit.
Depreciation and amortization expense. Depreciation and amortization
expense increased by $1.2 million, or 11.8%, to $11.6 million in fiscal 1996
from $10.4 million in fiscal 1995. The increase was primarily attributable to a
higher depreciable asset base in fiscal 1996 compared to fiscal 1995, most
notably in leasehold improvements and furniture and equipment. The asset base
increased due to capital improvements made during the year (such as the
remodeling of stores to accommodate the expanded hard parts merchandise
assortment and new store systems) and to the opening of new stores.
Interest expense. Interest expense increased by $194,000, or 3.2%, to $6.2
million in fiscal 1996 from $6.0 million in fiscal 1995. The increase was due
primarily to a higher average outstanding balance under the Existing Credit
Facility in fiscal 1996 compared to fiscal 1995, offset partially by lower
average interest rates during fiscal 1996 compared to fiscal 1995.
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<PAGE> 25
Income taxes. The Company's effective income tax rate decreased to 24.5% in
fiscal 1996 from 36.7% in fiscal 1995, primarily due to the benefit of
previously unrecognized tax assets and lower state taxes.
Net income. Net income decreased by $8.4 million, or 88.4%, to $1.1 million
in fiscal 1996 from $9.5 million in fiscal 1995 due to the factors discussed
above.
Fiscal Year Ended December 31, 1995 vs. Pro Forma Fiscal Year Ended December
25, 1994
Net sales. Net sales increased by $29.9 million, or 7.5%, to $429.0 million
in fiscal 1995 from $399.2 million in fiscal 1994. The increase was attributable
to an additional week's sales of $7.4 million in fiscal 1995, which consisted of
53 weeks compared to 52 weeks in fiscal 1994, and to new store sales due to 37
new store openings in fiscal 1995 compared to 24 in fiscal 1994. On a comparable
basis (53 weeks compared to 53 weeks), comparable store sales increased by $7.2
million, or 1.8%, to $405.7 million in fiscal 1995 from $398.4 million in fiscal
1994. The increase in comparable store sales resulted from a higher average
customer transaction size (as measured in dollars), which offset a slight
decrease in the average number of customer transactions per store. The Company
believes the reduction in customer transactions was due to disruptions caused by
extensive remodeling efforts during fiscal 1995 (90 stores were remodeled during
fiscal 1995 compared to 38 in fiscal 1994).
Gross profit. Gross profit increased by $26.1 million, or 17.2%, to $177.4
million in fiscal 1995 from $151.3 million in fiscal 1994, due to the increased
sales volume. During fiscal 1994, a non-recurring Merger-related write-up of
merchandise inventory of $12.9 million was charged to cost of goods sold, for
which there was no comparable charge during fiscal 1995. Excluding this
non-recurring charge, gross profit increased by $13.2 million or 8.1%. Gross
profit margin increased to 41.3% in fiscal 1995 from 37.9% in fiscal 1994, due
in part to the non-recurring Merger-related charge in fiscal 1994 described
above, excluding which the gross profit margin in fiscal 1994 was 41.1%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $6.7 million, or 4.9%, to $145.8 million in
fiscal 1995 from $139.1 million in fiscal 1994 due principally to the increased
sales volume. As a percentage of net sales, selling, general and administrative
expenses decreased to 34.0% in fiscal 1995 from 34.8% in fiscal 1994. This
decrease was primarily attributable to improved expense control.
EBITDA. EBITDA increased by $6.2 million, or 24.7%, to $31.4 million in
fiscal 1995 from $25.2 million in fiscal 1994 principally as a result of the
increased sales volume, better gross margins and lower operating expenses.
Depreciation and amortization expense. Depreciation and amortization
expense increased by $1.2 million, or 12.7%, to $10.4 million in fiscal 1995
from $9.2 million in fiscal 1994. The increase was due to a higher depreciable
asset base in fiscal 1995 compared to fiscal 1994, most notably in leasehold
improvements and furniture and equipment. The asset base increased due to
capital improvements made during the year (such as the remodeling of stores to
the expanded hard parts merchandise assortment), and to the opening of new
stores.
Interest expense. Interest expense increased by $910,000, or 17.8%, to $6.0
million in fiscal 1995 from $5.1 million in fiscal 1994. The increase was due
primarily to a higher average outstanding balance under the Existing Credit
Facility in fiscal 1995 compared to fiscal 1994.
Income taxes. The Company's effective income tax rate during fiscal 1995
differed from that in fiscal 1994 as no tax benefits were provided in fiscal
1994 for the Company's losses during that period.
Net income. Net income increased by $14.1 million to $9.5 million in fiscal
1995 from a net loss of $4.7 million in fiscal 1994 due to the factors discussed
above.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Since the Merger, the Company has utilized funds generated from operations
and borrowings under the Existing Credit Facility to meet working capital
requirements (principally merchandise inventory) and to fund capital
expenditures (principally the opening of new stores, remodeling and expansion of
existing stores,
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<PAGE> 26
information systems improvements and distribution center improvements). At March
30, 1997, the Company had net working capital of $47.8 million and $18.4 million
available for borrowing under the Existing Credit Facility. In connection with
the Recapitalization, the Company will enter into the New Credit Facility.
During fiscal 1996, the Company's principal sources of cash were $1.9
million from operations and $22.5 million from borrowings under the Existing
Credit Facility, which were used primarily to fund capital expenditures of $23.3
million. During fiscal 1995, the Company's principal sources of cash were $9.1
million from operations and $4.0 million from borrowings under the Existing
Credit Facility, which were used primarily to fund capital expenditures of $11.8
million. During the six months ended December 25, 1994, the Company's principal
sources of cash were $9.9 million from operations, $68.7 million from the
issuance of stock, and $34.5 million from borrowings under the Existing Credit
Facility, which were used primarily to fund capital expenditures of $6.5
million, to purchase the Predecessor for $67.6 million and to pay Predecessor
debt of $88.5 million. During the six months ended June 26, 1994 (Predecessor),
the principal sources of cash were $13.2 million from operations and $2.2
million from the sale of property and equipment, which were used primarily to
fund capital expenditures of $5.9 million and to repay debt of $9.5 million.
As a result of the Company's new store growth and major remodeling program,
the Company's capital expenditures and related investments in property, plant
and equipment and merchandise inventories have increased significantly. Capital
expenditures increased by $11.5 million, or 96.9%, to $23.3 million in fiscal
1996 from $11.8 million in fiscal 1995. The increase was due primarily to the
new store growth and the remodeling program, as well as to distribution center
improvements and store-related information systems. Merchandise inventories
increased by $32.8 million, or 30.5%, to $140.4 million in fiscal 1996 from
$107.6 million in fiscal 1995, due to the new store growth, the remodeling
program, the deliberate expansion of Chief's SKU count in a typical store, which
has doubled to an average of 16,000, since 1994, and other changes to product
mix. The Company plans to reduce inventory maintained in each store in the
future through improved inventory management.
During fiscal 1997, the Company plans to open approximately 40 new stores
and to relocate or expand approximately 25 existing stores. Additionally, the
Company plans to complete 80 remodels during fiscal 1997, and to improve
significantly its distribution systems. The total estimated cost of such new
store openings and existing store relocations and remodelings is approximately
$11.1 million.
The Company anticipates that substantially all of its new and relocated
stores during fiscal 1997 will be financed by arrangements structured as
operating leases that require no net capital expenditures by the Company except
for fixtures and store equipment. Merchandise inventories and related capital
expenditures for the new stores and remodeling are expected to be funded by
operations, working capital and credit facilities. The Existing Credit Facility
was increased from $50.0 million to $65.0 million effective January 26, 1996,
and then to $80.0 million effective November 4, 1996. The New Credit Facility
will provide for revolving credit borrowings up to $100.0 million, available
subject to a borrowing base formula. Under such formula, approximately $77.0
million is expected to be available under the commitment upon completion of the
Recapitalization, of which approximately $66.0 million is expected to be
available for additional borrowings on such date.
The Company believes that funds provided from operations and from credit
facilities currently in place will be sufficient to meet planned financial
commitments.
EFFECT OF INFLATION AND CHANGING PRICES
Inflation has not had a material effect on the Company's results of
operations. Chief has offset the effect of inflation by maintaining profit
margins through product mix enhancements and securing favorable purchase terms
from primary suppliers.
Substantially all of the Company's indebtedness (other than capitalized
leases) bears stated interest at rates that are subject to fluctuation. The
weighted average interest rate in effect on the Existing Credit Facility was
6.7% at March 30, 1997, 6.4% at December 29, 1996 and 8.5% at December 31, 1995.
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<PAGE> 27
NEW ACCOUNTING STANDARDS
During fiscal 1996, the Company adopted 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"). SFAS 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS 121
had no impact on the Company's financial position or results of operations.
Additionally, during fiscal 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 requires expanded disclosures of stock-based compensation
arrangements with employees, and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument. As more
fully described in Note 7 to the Financial Statements, the Company has opted to
continue the application of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, the adoption of
SFAS 123 was for disclosure purposes only and had no effect on the Company's
financial position or results of operations.
PRO FORMA 1994 INFORMATION
In the table shown below, a pro forma statement of operations for the year
ended December 25, 1994 is presented, which gives effect to the Merger as if it
had occurred on December 27, 1993 in order to illustrate how the Merger might
have affected the historical Financial Statements of the Company.
The pro forma data do not purport to represent what the Company's financial
position or results of operations would actually have been had the Merger in
fact occurred on the assumed date or to project the Company's financial position
or results of operations for any future date or period.
In order to present the combined results of operations of the two
companies, the Predecessor results were adjusted to reflect the pro forma
Merger-related activity that might have resulted if the Merger had occurred at
the beginning of the Predecessor's fiscal period. The unaudited pro forma Merger
adjustments reflect purchase accounting treatment of the Merger and the
repayment of Predecessor debt, as follows:
PRO FORMA 1994 STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
SIX MONTHS ENDED SUCCESSOR PRO FORMA
JUNE 26, 1994 SIX MONTHS COMBINED
------------------------------------ ENDED YEAR ENDED
MERGER AS DECEMBER 25, DECEMBER 25,
ACTUAL ADJUSTMENTS(1) ADJUSTED 1994 1994
-------- -------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales......................... $195,286 $ -- $195,286 $203,878 $399,164
Costs and expenses:
Costs of goods sold, warehousing
and distribution............. 114,452 -- 114,452 133,390 247,842
Selling, general and
administrative............... 68,642 (59) 68,583 70,500 139,083
Depreciation and amortization... 3,626 583 4,209 5,020 9,229
-------- ------- -------- -------- --------
Profit (loss) from operations..... 8,566 (524) 8,042 (5,032) 3,010
Interest expense, net............. 5,807 (3,241) 2,566 2,533 5,099
Other income, net................. 41 -- 41 4 45
-------- ------- -------- -------- --------
Profit (loss) before income
taxes........................... 2,800 2,717 5,517 (7,561) (2,044)
Income tax expense................ 1,383 686 2,069 537 2,606
-------- ------- -------- -------- --------
Net income (loss)................. $ 1,417 $ 2,031 $ 3,448 $ (8,098) $ (4,650)
======== ======= ======== ======== ========
</TABLE>
- ---------------
(1) Selling, general and administrative -- Reduced expense of $734,000 relating
to leaseholds, primarily arising from unfavorable leasehold obligations
which resulted from the purchase price allocation, additional deferred
compensation expense of $779,000 incurred in connection with a deferred
compensation plan entered into in connection with the Merger and a
reduction of $104,000 of other merger-related adjustments.
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<PAGE> 28
Depreciation and amortization -- additional annual amortization of $715,000
arising from goodwill resulting from the Merger, an increase of $508,000 in
depreciation resulting from the increased basis of assets under capitalized
leases acquired in the Merger and a decrease in depreciation of $640,000
related to other fixed assets acquired in the Merger.
Interest expense, net -- principally a net reduction of interest expense of
$3.0 million resulting from the repayment of Predecessor debt with proceeds
from issuance of common stock in the Merger and the replacement of the
Predecessor line of credit with the Existing Credit Facility bearing lower
interest rates, and a net reduction of annual interest expense of $241,000
relating to obligations under capital leases.
Income tax expense -- increase in federal income taxes relating to the net
effect of the above items, excluding goodwill, presented on the same basis
(alternative minimum tax) as reflected in both the Predecessor's and the
Successor's separate historical results.
No adjustment is made to cost of goods sold, warehousing and distribution
in the Predecessor's results, as the non-recurring charge arising from the
write up of merchandise inventories by $12.9 million from the historical
cost as carried by the Predecessor at the time of the Merger is reflected
in the Successor's results for the six months ended December 25, 1994.
26
<PAGE> 29
BUSINESS
GENERAL
Chief is one of the nation's largest auto parts and accessories retail
chains, both in number of stores and annual revenue, with 547 retail stores as
of March 30, 1997 located in six states, primarily concentrated in Southern
California and Texas. The Company's research indicates that it is a market
leader based on number of stores in its six primary markets -- Los Angeles,
Dallas/Fort Worth, Sacramento, San Diego, Las Vegas and Fresno -- with more than
twice as many stores as its nearest competitor in the Los Angeles market. The
Company is a consumer-oriented, specialty aftermarket retailer, primarily
serving DIY customers and, to a lesser extent, commercial customers. Chief's
product mix of approximately 16,000 SKUs in its typical retail store features
nationally known brand names, as well as private label automotive parts,
including new and remanufactured hard parts, accessories and maintenance items.
The Company's Chief Executive Officer, David H. Eisenberg, joined the
Company in 1992 and subsequently recruited many of the Company's current senior
executives. Since fiscal 1993, net sales and EBITDA (as defined in note (f) to
the Summary Financial and Other Data table) have increased an average of 5.4%
and 18.6% per year (based on the average of the percentage change from one year
to the next for 1993, pro forma 1994, 1995 and 1996), respectively, to $438.2
million and $33.3 million, respectively, in fiscal 1996. Chief's management team
has instituted a number of initiatives designed to promote the Company's image
as a premier retailer for the DIY customer including a focus on competitive
pricing and superior customer service; investment in store expansions,
relocations and remodelings; and enhancement of information systems to improve
customer service, productivity and inventory management.
In June 1994, The Principal Fund and certain of its affiliates acquired
Chief through the merger of a shell corporation into the Company. Prior to the
Merger, certain third party investors owned warrants to purchase approximately
93.4% of the Common Stock on a fully diluted basis and certain current and
former employees of Chief owned shares of, and options to purchase shares of
Common Stock, representing an aggregate of approximately 6.6% of the Common
Stock on a fully diluted basis. In connection with the Merger, The Principal
Fund and its affiliates contributed $67.0 million to the Company and received
shares representing approximately 88.6% of the Common Stock on a fully diluted
basis. The third party investors received cash and warrants representing
approximately 10.7% of the Common Stock on a fully diluted basis and the
employee investors received cash and warrants representing approximately 0.7% of
the Common Stock on fully diluted basis, as well as the reservation of certain
shares for issuance either pursuant to stock purchase agreements or upon
exercise of options representing an aggregate of an additional 12.43% of the
Common Stock on a fully diluted basis after giving effect thereto. Pursuant to a
subadvisory agreement, Oaktree manages The Principal Fund. The acquisition
significantly deleveraged the Company, providing it with access to growth
capital and enabling management to focus on operational improvements and growth.
The support and flexibility afforded by this change in Chief's capital structure
enabled management to reposition the Company from a chain of smaller automotive
parts convenience stores to a full-line auto parts and accessories chain. Since
June 1994, the Company has invested approximately $45.1 million in total capital
expenditures in connection with its program to reposition Chief in the
automotive aftermarket marketplace and has doubled the average number of SKUs in
its stores. During this period, the Company remodeled 292 of its stores, opened
99 new stores, relocated 19 stores to larger, more favorable locations averaging
5,390 square feet (an increase from approximately 2,740 square feet for such
stores prior to relocation), closed 45 small or underperforming stores and
introduced Chief's commercial sales program into 32 existing stores (as of April
30, 1997, 16 of which were opened in the last 60 days). The Company has
substantially completed its program of repositioning Chief as a full-line auto
parts and accessories chain.
Chief's redesigned store layouts and enhanced product offerings enable the
Company to merchandise store product lines to target more effectively the needs
of the DIY customer, resulting in increased sales of "hard parts" (such as
alternators and starters) which carry higher margins and higher average
transaction prices than many of the Company's other products, such as motor oil.
These improvements also have contributed to an increase in gross profit margins
and EBITDA margins (as defined in note (g) to the Summary Financial and Other
Data table) from 37.9% and 6.3%, respectively, in fiscal 1994 to 42.5% and 7.6%,
respectively, in fiscal 1996.
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<PAGE> 30
Management believes that the automotive aftermarket parts industry is
growing as a result of: (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. Management further believes that the retail
auto parts industry displays certain recession-resistant characteristics
resulting from a shift from professional repairs to DIY repairs during economic
downturns and sales increases in automobile enhancement products during better
economic conditions.
OPERATING STRENGTHS AND BUSINESS STRATEGIES
Chief attributes its present success and significant opportunities for
continued growth to the following operating strengths and business strategies:
- Leading position in favorable markets.The Company's research indicates
that it is a market leader based on number of stores in its six primary
markets -- Los Angeles, Dallas/Fort Worth, Sacramento, San Diego, Las
Vegas and Fresno -- with more than twice as many stores as its nearest
competitor in the Los Angeles market. California and Texas are the two
largest states in the country in terms of vehicle registration and
population, and both have climates suited for year-round outdoor auto
repair activities. The Company has achieved a high level of name
recognition with its customers in these markets as a result of
consistently providing high quality products and customer service.
- Investments in store relocation, expansion and remodeling. Chief has
focused on relocating and expanding existing stores to larger locations
with more customer-friendly layouts and identifying desirable locations
for opening new stores, primarily in existing markets. The Company also
significantly redesigned its store layout and remodeled 292 of its stores
from June 1994 through March 1997. Seventy-four percent of the Company's
existing store base is either new or has been remodeled since June 1994.
Chief plans to open 40 new stores, to relocate or expand at least 25
stores and to complete 80 remodels in 1997 at an aggregate estimated cost
of $11.1 million. The Company plans to remodel approximately 15 stores
each year for the four year period beginning January 1, 1998 at an
estimated total cost of $10.7 million. The Company expects to finance
such activity with a combination of funds generated from operations and
borrowings under the New Credit Facility.
- Enhancement of management information systems. Management has adopted a
strategy of enhancing Chief's customer service, productivity, inventory
and merchandising management through the implementation of new and
improved technology-based systems, including (i) the integration of its
point-of-sale system and electronic parts catalog, (ii) the introduction
and continued roll-out of perpetual inventory systems in its stores and
(iii) the installation of portable, hand-held radio frequency computer
devices to automate price management, receiving, shipping and ordering
functions in each store and distribution center and to facilitate the
management of the perpetual inventory system. Management believes these
systems should contribute to improved profitability.
- Commercial sales program. The Company recently initiated its commercial
sales program, marketed towards the commercial segment of the automotive
aftermarket industry, which the Company believes constitutes
approximately $40-$45 billion of the total estimated $75 billion annual
sales for the automotive aftermarket industry. In stores with commercial
sales capabilities, Chief offers commercial customers over 20,000 SKUs
delivered within 30 minutes from time of order. As of April 30, 1997, the
Company has introduced commercial sales capabilities into 32 of its
existing stores, 16 of which were opened within the last 60 days at an
estimated cost of $500,000. Chief believes that a successful commercial
sales program will complement the Company's existing retail business. The
Company will evaluate the performance of its existing commercial sales
program before planning any further expansion of the program into
additional stores.
- Emphasis of competitive advantages over smaller retailers. The Company
will continue to consolidate its position in key markets by enhancing its
competitive advantages over smaller competitors including: (i) economies
of scale in advertising, distribution and warehousing, (ii) an ability to
stock and warehouse a larger number of SKUs, including private label
brands; (iii) lower product costs as a result of purchasing directly from
manufacturers rather than through distributors; (iv) an ability to
attract talented employees and offer attractive career paths; (v)
superior customer service due to better information systems and
continuous employee training; and (vi) a greater number of locations and
extended store hours.
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<PAGE> 31
- Strong management team with significant equity ownership. Chief's
management team has repositioned the Company from a chain of smaller
automotive parts convenience stores to a full-line auto parts and
accessories chain. Four of the Company's top executives, including the
Chief Executive Officer, David H. Eisenberg, joined the Company following
their management of Peoples Drug Stores Incorporated, a drugstore chain
with approximately 500 locations. The Company's six senior executives
average more than 24 years of experience in the retail industry and
possess a diverse skill base which incorporates marketing, merchandising,
distribution, management information systems integration and customer and
vendor relationships. Senior management owns 9.2% of Chief's common stock
on a fully diluted basis.
HISTORY OF THE COMPANY
The original "Chief" automotive retail business began in September 1955
with one store in Norwalk, California near Los Angeles and had grown to 119
retail stores located in the greater Los Angeles area by the time Southland
purchased this business in December 1978; Southland grew the business by opening
new stores and by acquiring existing operations. In February 1985, Southland
acquired 86 Checker Auto Parts and Honey's Auto Parts stores, located
principally in the Dallas-Fort Worth area, from Lucky Stores, Inc. Also in
February 1985, Southland acquired 13 "2002" Auto Parts stores located in
Houston. Southland sold the business to a group of investors and prior
management in a leveraged buyout in 1988. In 1992 and 1993, a new management
team joined the Company and began to reposition Chief as a full-line retail auto
parts and accessories chain. When The Principal Fund and its affiliates
purchased the Company in June 1994, the Company operated 493 stores under the
name Chief Auto Parts. As of March 30, 1997, the Company operated 547 stores in
the states of California, Texas, Nevada, Tennessee, Arizona and Arkansas.
AUTOMOTIVE AFTERMARKET INDUSTRY
According to industry estimates, the size of the automotive aftermarket for
replacement parts, maintenance items and accessories was approximately $75
billion in sales in 1995. The retail portion of this market is estimated at $35
billion of this total market. The Company believes that the automotive
aftermarket for parts, maintenance items and accessories is growing due to
several factors, including: (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. Industry sources indicate that average
annual sales in the retail automotive parts market in the United States have
increased at a compound annual growth rate of 2.4% from 1990 to 1995.
The automotive aftermarket distribution channels currently are highly
fragmented in both the commercial and DIY segments. The Company believes that
consolidation of the industry is occurring 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 that automotive specialty retailing
chains, such as the Company, are in a favorable competitive position because
they have the distribution capacity and sophisticated information systems to
stock, advertise and deliver a broad inventory selection.
PRODUCTS
Product Selection. The Company offers a broad selection of nationally
recognized name brand and private label automotive products. The product mix of
approximately 16,000 SKUs in the Company's typical store includes new and
remanufactured hard parts such as alternators, starters, water pumps, brake
parts, clutches and shock absorbers; maintenance items such as oil and
lubrication products, antifreeze, chemicals, filters and waxes and protectants;
and various other products such as lighting systems, electrical components,
ignition parts, batteries, spark plugs, belts, hoses, gaskets, tools, equipment,
supplies and accessories. The Company also offers certain other parts, such as
engines, as special order items. The Company's broad selection of national brand
name products includes Monroe shocks, Borg-Warner clutches and clutch parts,
Fram air and oil filters,
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<PAGE> 32
Raybestos brakes, Champion batteries, Bosch spark plugs and oxygen sensors and
Gates belts and hoses. These products generate customer traffic and have strong
appeal to Chief's commercial customers. The Company's wide selection of high
quality private label products appeals to value-conscious customers. The Company
backs many of its products with either a one-year or a lifetime warranty.
The Company continually reevaluates its product selection in order to
ensure that its product mix in each store meets current customer demand and is
appropriate to the needs of its customer base. Moreover, the Company
periodically modifies its product selection and discontinues underperforming
merchandise categories to improve its profitability and inventory turnover. For
example, as part of its recent remerchandising efforts, the Company increased
its selection of "hard parts," such as alternators and starters, which carry
higher margins and higher average transaction prices than other products, such
as motor oil.
Purchasing. Purchasing for all stores is consolidated at the Company's
headquarters in Dallas under the direction of the marketing department. In most
cases, the Company buys products directly from manufacturers rather than
purchasing from a distributor. Due to the Company's high sales volume, it is
generally able to obtain discounts and favorable terms from manufacturers. The
Company maintains multiple sources for the majority of the private label brands
it carries and has strategic alliances and long-standing relationships with many
suppliers. The benefits of these strategic alliances include special merchandise
purchases, regional testing of new products supplied to the Company at little or
no cost and extended payment terms on certain products. In fiscal 1996, Echlin,
Inc., one of the Company's strategic partners and suppliers of ignition parts,
fuel pumps, brakes and brake parts, accounted for approximately 13.7% of the
Company's total purchases and GNB Incorporated, a supplier of batteries,
accounted for approximately 10.5% of the Company's total purchases. The Company
does not have written agreements with either Echlin, Inc. or GNB Incorporated.
Substantially all of the Company's suppliers ship products to the Company's
distribution centers, from which products are delivered to stores once a week.
With its continuing program to upgrade the technological capabilities of its
stores, the Company currently orders over 90% of its products electronically.
Pricing. The Company's pricing policy focuses on providing customers with
high-quality products at competitive prices in each of its markets. The Company
conducts regular price checks to ensure that its prices remain competitive,
particularly with respect to high profile items, and offers to match
competitors' prices on certain of its products such as motor oil. In
particularly price sensitive markets, the Company offers a one-year warranty on
its products, as an alternative to a more costly lifetime warranty.
STORE OPERATIONS
Store Formats
Chief's current store prototype is 5,400-6,000 square feet in size, and the
Company is aggressively expanding or relocating its smaller stores into larger
facilities at better locations. Since June 1994, the Company has remodeled,
relocated or expanded 311 stores. Chief has increased the average size of its
stores to 3,853 square feet at March 30, 1997 from 3,312 square feet at year-end
1992.
The following table sets forth certain information regarding the Company's
stores by size as of March 30, 1997.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
STORE SIZE OF STORES OF STORES
- ---------- --------- ----------
<S> <C> <C>
5,000 sq. ft. or greater.................................... 91 17%
4,000 -- 5,000 sq. ft. ..................................... 106 19
3,500 -- 4,000 sq. ft. ..................................... 171 31
3,000 -- 3,500 sq. ft. ..................................... 39 7
Less than 3,000 sq. ft...................................... 140 26
--- ---
Total............................................. 547 100%
--- ---
</TABLE>
The Company emphasizes customer service and convenience with its store
size, hours of operation and locations. The Company's stores range from 1,840 to
10,640 square feet, with newer stores averaging 5,400 to 6,000 square feet, and
are generally located in neighborhood shopping centers, shopping center pads or
other high
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<PAGE> 33
visibility, high traffic locations. Stores are open at least from 8:00 a.m. to
9:00 p.m., seven days per week, with many stores opening at 6:00 a.m. and many
stores staying open until midnight. Thirty-two locations are open 24 hours per
day. The Company has located at least one 24-hour store within each of its major
market areas and provides its customers with a toll-free telephone number 24
hours per day to assist them in locating the Company's nearest open store. The
Company strives to make its stores a convenient shopping environment with
easy-to-find products, a speedy check-out process, clean and uncluttered aisles,
numerous merchandise displays and attention-getting, in-store signage. In its
new and redesigned stores, the Company stocks automotive accessories in
self-service shelves and aisles and stocks "hard" parts, which generally demand
a higher level of employee assistance, behind a "high steel" parts counter,
attended by a parts-knowledgeable salesperson.
Geographic Distribution
The Company's 547 stores are organized into five geographic regions, each
administered by a Regional Vice-President who oversees from four to 12 District
Managers. District Managers are responsible for nine to 20 stores. The Company's
headquarters are located in Dallas, Texas, and the Company operates two
warehouse and distribution centers: one near Dallas in Seagoville, Texas and one
near Los Angeles in Cerritos, California. The table below shows the location and
number of the Company's 547 operating stores, eight principal offices and two
warehouses by state as of March 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF
OPERATING NUMBER OF OFFICES
STATE STORES AND WAREHOUSES
- ----- --------- -----------------------
<S> <C> <C>
California.......................................... 381 4 offices, 1 warehouse
Texas............................................... 129 4 offices, 1 warehouse
Nevada.............................................. 25 --
Tennessee........................................... 8 --
Arizona............................................. 3 --
Arkansas............................................ 1 --
--- -----------------------
Total..................................... 547 8 offices, 2 warehouses
--- -----------------------
</TABLE>
STORE DEVELOPMENT AND EXPANSION STRATEGY
The Company operates as a neighborhood store, and promotes this image by
generally selecting store sites in high density, high visibility areas such as
shopping centers and high traffic street corners. Chief's management continually
reevaluates the competitive position and profitability of its stores to
determine which stores would benefit from relocation or remodeling and in which
areas it should open new stores. The Company has begun to seek locations in
smaller communities near cities it currently serves, and which the Company
believes are not currently being served by automotive retail chains. The Company
is seeking to penetrate further its existing markets in the Western United
States by (i) expanding successful stores at existing locations and, where
necessary, by relocating stores in the same market to maximize sales volume and
profitability at proven sites and (ii) adding new stores in markets contiguous
to those currently served by the Company in order to increase market
penetration, while benefiting from economies of scale in advertising,
distribution and management costs.
The Company plans to open approximately 40 new stores and to relocate or
expand approximately 25 stores in fiscal 1997, primarily in its existing
markets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." As a result of its
new, relocated and remodeled stores, the Company expects that by the end of
1997, only 19% of its stores will be less than 3,000 square feet. Substantially
all of Chief's remodeled, expanded and new stores have the capacity to carry
approximately 16,000 SKUs and Chief stores with commercial sales capabilities
carry a minimum of 20,000 SKUs.
The Company routinely evaluates existing locations to determine which
stores could increase sales, market share and profitability by remodeling.
Remodeling may consist of one or more of the following: (i) enlarging the store,
usually by leasing adjacent premises; (ii) creating a parts counter and high
steel sales area; and (iii) image enhancement through cosmetic changes to the
store to update signage, fixtures, store frontage, lighting and/or
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<PAGE> 34
floor covering. The Company has remodeled 292 stores since June 1994, at an
approximate total cost of $15.4 million and expects to complete 80 remodels in
1997, at an approximate total cost of $2.5 million.
The Company performs new store site analysis using internally developed
methods, procedures and models which incorporate trade area demographics (such
as population density, growth patterns, age, per capita income and vehicle
traffic counts), competitive aspects (such as the number and type of existing
automotive-related facilities, including automotive parts stores and other
competitors, within a specified radius of the potential new location) and prior
experience from similar types of locations. The Company's real estate
representatives perform initial site sourcing and analysis with assistance from
local real estate brokerage firms. Appropriate managers within the Company
perform further review and approvals and compare potential locations to existing
store locations to determine opportunities for relocating or expanding existing
stores and opening new stores. The Company's new stores typically become
profitable during the first year of operation.
The following table sets forth the Company's store development activities
during the period indicated.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH
-------------------------------- -------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Stores at beginning of period................... 526 495 492 495 520 520 544
New stores...................................... 2 14 18 34 51 12 5
Relocated stores................................ 2 1 6 3 12 2 2
Closed stores (including relocated stores)...... (35) (18) (21) (12) (39) (4) (4)
--- --- --- --- --- ---- ----
Stores at end of period............... 495 492 495 520 544 530 547
=== === === === === ==== ====
Remodeled or expanded stores.................... 25 29 38 90 159 91 18
=== === === === === ==== ====
</TABLE>
WAREHOUSE AND DISTRIBUTION
The Company services all its stores from two warehouse distribution
centers, one located in Cerritos, California, near Los Angeles and one in
Seagoville, Texas, near Dallas. Substantially all of the Company's merchandise
is shipped by vendors to the Company's distribution centers with deliveries
being made to each of the Company's stores once per week, with the exception of
batteries, which are shipped directly to stores by the vendor. In order to
improve the efficiency and accuracy of its distribution operations, the Company
has installed portable radio frequency computer terminals in its stores and its
distribution centers. These terminals automate inventory management, as well as
store merchandise returns and shipment quality assurance.
The following table sets forth certain information relating to the
Company's two main distribution centers as of March 30, 1997:
<TABLE>
<CAPTION>
NUMBER
APPROXIMATE OF
DISTRIBUTION TOTAL STORES
CENTER AREA SERVED SIZE (SQ. FT.) SERVED
- -------------- ----------- -------------- ------
<S> <C> <C> <C>
Seagoville, TX Texas, Tennessee, Arkansas............................ 245,000 138
Cerritos, CA California, Nevada, Arizona........................... 304,000 409
------- ---
Total................................................. 549,000 547
======= ===
</TABLE>
COMMERCIAL SALES PROGRAM
Although Chief's primary focus is the DIY customer, the Company believes
that a successful commercial sales program will complement the Company's
existing retail business. The commercial segment of the automotive aftermarket
parts market constitutes approximately $40-$45 billion of annual sales (57% of
the total automotive aftermarket parts market). In 1995, the Company began to
develop its commercial sales program, called the Professional Parts Warehouse
("PPW"), by providing service to commercial customers from existing Company
stores. The PPW program 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. As of April 30, 1997, the Company has implemented the PPW program in 32
existing
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<PAGE> 35
retail stores, including 20 in California, ten in Texas and two in Nevada. The
Company intends to capitalize on its reputation for carrying quality name brand
parts and superior customer service in developing the commercial sales program.
Chief's stores with commercial sales capability generally stock
approximately 20,000 SKUs, compared to an average of 16,000 SKUs in other
Company stores. Such stores typically maintain two delivery trucks and four
dedicated drivers in order to meet a 30 minute delivery time to commercial
customers. The Company currently services incoming commercial sales calls
through two centralized commercial call centers, one in Texas, and one in
California. Commercial customers call a toll-free number and are automatically
routed to their preferred specialist, one member of a two-person team
responsible for that commercial customer.
In addition, in three of its commercial stores, the Company is testing a
program in which it will stock an additional 6,000 SKUs of Beck-Arnley products,
a quality name brand of import replacement parts. The Company believes that the
Beck-Arnley products will appeal to commercial customers that repair foreign
automobiles which could potentially create a broader commercial customer base
for the PPW program.
In fiscal 1996, the Company's sales to commercial customers were $3.9
million. The Company believes that its selective roll-out of this PPW program
will lead to further growth in sales to commercial customers in 1997.
INFORMATION SYSTEMS
Management has adopted a strategy of enhancing Chief's customer service,
productivity and its inventory and merchandising management through selected
implementation of new and improved technology-based systems. The Company's
management information systems constitute an important part of the Company's
operations and growth strategy. The Company has increased the capabilities of
its staff through accelerated employee training programs and the hiring of
additional information systems staff. The Company estimates that the planned
implementation and enhancement of its information systems will cost an aggregate
of approximately $1.6 million in 1997 and an aggregate of $19.6 million over the
next five years, which the Company intends to finance with a combination of
funds generated from operations and borrowings under the New Credit Facility.
Point of Sale System. Each of the Company's stores has a point-of-sale
system that is linked to the Company's IBM AS400 central mainframe computer
located in Seagoville, Texas. Chief expanded the capabilities of this system in
1994 with the integration of its electronic parts catalog ("EPC") with its point
of sale system.
Electronic Parts Catalog. The Company has installed an electronics parts
catalog in all of its stores which has been designed to improve the Company's
competitiveness by offering improved service to customers and which has been
integrated with the Company's point of sale system. The EPC is a user-friendly
tool which catalogs over one million parts and which enables the Company's
employees to assist customers in parts selection and ordering. The integration
of the point of sale system and the EPC allows employees to ascertain whether
Chief carries any particular item listed in the EPC, and speeds the check-out
process. The EPC displays related parts that store employees can recommend to
the customer for purchase and can be used as a selling tool. The EPC enables a
faster, more accurate search for customer parts requirements, improves special
order capabilities, quickens the pace of new employee training, improves
employee confidence in making parts recommendations and can increase sales of
related items and reduce returns.
Perpetual Inventory System. The Company has developed and is currently
installing a store level perpetual inventory system that electronically monitors
inventory, allowing employees to determine which products are in stock, on order
or overstocked. The Company has currently installed the perpetual inventory
system in 97 stores, and it expects to install the system in all of its stores
by the end of 1997.
Radio Frequency Terminals. The Company is installing portable radio
frequency ("RF") computer terminals in all stores to reduce labor, increase
productivity and facilitate management of the perpetual inventory system. The RF
terminals validate the inventory in stock in each store and will match such
information with the perpetual inventory system. The Company plans to implement
additional RF capabilities during the next 12 months in order to automate price
management as well as receiving, shipping and ordering. Using the RF terminals,
the Company expects that each store will be able to tailor ordering to its
particular needs instead of automatically reordering inventory.
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<PAGE> 36
In-Store Printing System. The Company expects that by the end of 1997 each
store will have updated laser printers with the capacity to produce signs and
shelf labels that automatically reflect local market pricing. In-store printing
will automate price changes, improve price integrity and reduce store labor
costs associated with price changes. Such signs and shelf labels are currently
produced by local advertising firms and delivered to store locations, which is
more costly and less responsive than in-store printing.
Merchandising Systems. The Company recently installed the Chief Auto
Reporting System, a graphical information system for sales and inventory
analysis. The system provides information to the level of a specific item in a
specific store for a specific day. During the third quarter of 1996, the Company
installed a client server in order to automate the creation of plan-o-grams,
facilitate product movement and maximize product placement on store shelves.
Electronic Vendor Communication Systems. As a result of a focused effort to
establish electronic data imaging communications with its vendors, the Company
currently orders over 90% of its purchases electronically. The Company also is
beginning to introduce other enhanced electronic vendor communication
techniques, such as Vendor Managed Inventory and an Automated Invoice Matching
System.
CUSTOMER SERVICE
The Company believes that a distinct understanding of its customer base is
important to providing superior customer service. The Company has conducted
extensive market research to characterize its customers and analyze their
awareness of the Company. Customer feedback has indicated that Chief customers
value five principal qualities in Chief stores -- convenience, value, service,
selection and dependability. The Company has focused on enhancing these
qualities in order to attract existing and future Chief customers and to improve
the quality of the service which the Company can offer to its customers.
As part of its overall operating strategy to position Chief as a premier
retailer for the DIY customer and to satisfy customer expectations, the Company
has made significant investments in training service personnel and improving
store-level systems. This strategy enables the Company's in-store personnel to
serve effectively their customers' automotive needs. The Company has made a
concerted effort to attract and retain "parts knowledgeable" people who can
provide technical assistance to the customer. In order better to serve 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, headlights and other
selected products; flexible return policies; and lifetime warranties.
The Company believes that recruiting, training and retaining high quality
employees is an important ingredient of successful customer service. The Company
has implemented structured on-the-job training programs and incentives to
encourage the development of technical expertise of its store personnel that
enables them to effectively advise customers on product selection and use. The
Company's employees go through "Fast Start" video and in-store training,
followed by seminars with some of the Company's principal vendors. At the
beginning of 1997, the Company announced a new incentive program designed to
encourage its employees to become ASE certified parts specialists, a designation
awarded by the National Institute for Automotive Service Excellence and a symbol
of technical expertise recognized throughout the automotive industry. 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. A majority of the Company's store
managers have completed an internal Store Management Certification Program. The
Company believes that its training programs enable store employees 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.
ADVERTISING
The Company has pursued an aggressive advertising campaign designed to
enhance the name recognition of the Company and to increase awareness of Chief's
key strengths, such as customer service, competitive pricing, quality
merchandise, product selection, convenient locations and extended hours. The
Company has commenced an "All New Chief" advertising campaign in its six primary
market areas, most recently in the Los Angeles, California market, which
emphasizes the Company's significantly improved merchandising strategy. The
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<PAGE> 37
Company's advertising strategy includes television, radio and newspaper
advertising. The Company also utilizes an in-store radio advertising and music
program and in-store promotional displays that are intended to provide a more
pleasant shopping environment, as well as increase product movement. The
Company's bright, contemporary logo and supporting outdoor signage are designed
to be visible and legible to consumers day and night. The Company's in-store
signs and displays are used to promote products and identify departments, as
well as to announce store specials. Much of the Company's advertising is
co-sponsored by product vendors.
In 1996, Troy Aikman agreed to act as a spokesman for the Company. As the
quarterback for the Dallas Cowboys and a former quarterback for UCLA, Mr. Aikman
has strong appeal in the Company's two largest markets. Mr. Aikman is a
nationally recognized sports figure, and the Company believes that his high
visibility and popularity will be valuable to the Company's advertising efforts.
Mr. Aikman is featured in the Company's television and radio advertisements, as
well as in print advertising. In addition, to further its image with the car
enthusiast, the Company has sponsored National Hot Rod Association car racing
events. These events have given the Company national exposure via live ESPN
television coverage.
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 faces competition primarily from similar auto parts
retail chains and, to a lesser extent, tire stores, mass merchandisers, car
dealerships, gas stations and jobber retailers.
The Company competes primarily with national and regional automotive
aftermarket retailers such as AutoZone, Inc., CSK Auto, Inc.
(Checker/Schuck's/Kragen), Grand Auto, Hi-Lo Automotive, Inc. and The Pep
Boys -- Manny, Moe and Jack, Inc. The Company's competitors also include (i)
certain "conglomerate retailers" such as Dart Group Corp. (Trak Auto), (ii)
automobile dealers and mass merchandisers that carry automotive replacement
parts, maintenance items and accessories such as K mart Corporation, the Target
Stores division of Dayton Hudson Corp., Wal-Mart Stores, Inc. and Sears Roebuck
& Co. (Western Auto), and (iii) wholesalers or traditional jobber retail stores
(some of which are associated with national automotive parts distributors or
associations such as National Auto Parts Association ("NAPA")) such as Green
Light, Automotive Parts Systems, Big "A" Auto Parts, Bumper to Bumper and
Carquest. Traditional wholesalers or jobber retailers, such as NAPA, also
provide significant competition for the Company's commercial business.
The principal competitive factors that affect the Company's business are
store location, customer service, quality of employees and product selection,
availability, quality and price. While the Company believes that it competes
effectively in its various geographic areas, many competitors are larger in
terms of sales volume and have greater financial resources.
EMPLOYEES
As of April 30, 1997, the Company employed a total of 5,862 employees,
consisting of 3,337 full-time employees and 2,525 part-time employees.
Approximately 87% of these employees were employed in store operations, 8% in
administrative or corporate positions and 5% in distribution. On February 13,
1997, the Company entered into a collective bargaining agreement with respect to
approximately 20 truck drivers and yard employees at the Company's Cerritos,
California distribution center. The Company has had no labor-related work
stoppages and believes that its labor relations are good.
PROPERTIES
As of March 30, 1997, the Company owned 53 of its 547 operating stores and
leased or subleased the remaining 494 stores from third parties under leases
expiring between 1997 and 2028. Eighteen of the Company-owned buildings are
located on property which is ground leased from third parties under leases
expiring between 1997 and 2007. In most cases, such leases are subject to
customary renewal options. The Company owns 245,000 square-foot distribution
center in Seagoville, Texas, leases its 304,000 square-foot distribution center
in Cerritos, California, and leases its 27,000 square-foot executive offices in
Dallas, Texas. The Company believes that additional facilities, if needed, would
be readily available on a timely basis on commercially reasonable terms. In
addition, the Company believes that the leased space that houses its existing
office, warehouse and distribution facilities is not unique and could be readily
replaced, if necessary, at the end of the terms of its
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<PAGE> 38
existing leases on commercially reasonable terms. The minimum lease term on 74
of the Company's stores under 3,500 square feet will expire before the year 2000
and 25 of the Company's stores under 3,500 square feet are Company-owned. See
Note 5 to Notes to Financial Statements.
TRADENAMES AND TRADEMARKS
The Company owns and has registered the trademarks "Chief Auto Parts,"
"America's Chief Auto Parts Stores" and "Chief" with the United States Patent
and Trademark Office for use in connection with the automotive parts retailing
business throughout the United States. The Company owns and has registered the
trademark "Professional Parts Warehouse" and "PPW" in connection with its
commercial sales program. In addition, the Company owns and has registered
numerous trademarks, such as "Ultra Last," for use in connection with many of
its private label products including alternators, starters, brake pads and hand
tools. The Company believes that its various tradenames and trademarks are
important to its merchandising strategy, but that its business is not dependent
on any particular service mark, tradename or trademark.
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 battery recycling and used oil and oil filters, 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. The Company also
currently provides a recycling program for the collection of used oil and oil
filters at certain of its stores as a service to its customers pursuant to
agreements with third party vendors. In addition, the Company collects and
temporarily holds battery cores pursuant to an agreement with the Company's
battery vendor. Pursuant to these agreements, the used oil and oil filters and
battery cores are collected by Company employees, deposited into vendor-supplied
containers/pallets and then disposed of by the third-party vendors. To date,
compliance with applicable laws and regulations has not had a material effect on
the Company's results of operations and financial condition. However,
environmental laws have changed rapidly in recent years, and the Company may be
subject to more stringent environmental laws in the future. There can be no
assurance that more stringent environmental laws would not have an adverse
effect on the Company's results of operations.
In addition, 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. Compliance with such laws and regulations has not
had a material impact on the Company's 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. The Company is also
indemnified by Southland against losses associated with any environmental
contamination existing on the date of the sale of the Company by Southland.
LEGAL PROCEEDINGS
The Company is the defendant in two lawsuits alleging that the Company
failed to pay store managers and associate store managers in California for
overtime compensation as required by California law. On September 21, 1993, a
lawsuit was filed in the Superior Court of California, County of Alameda by
Stephen Cooper, a manager, on his own behalf and on behalf of all persons
similarly situated. Mr. Cooper is alleging that the Company's store managers and
associate store managers in California are not exempt employees under California
law, and that the Company failed to compensate its store managers and associate
store managers for overtime compensation as required by California law. In
December 1994, the court denied class certification to Mr. Cooper. However,
since the date this lawsuit was filed, approximately 242 current and former
employees have joined Mr. Cooper's lawsuit. In addition to the claims filed in
Alameda County, 15 current and former employees filed a lawsuit based on the
same claims against the Company on March 5, 1996 in the Superior Court of
California, County of San Joaquin. The Company is vigorously defending against
the claims of all plaintiffs.
In September 1996, at the recommendation of the Alameda court, the parties
submitted to binding arbitration with respect to eight of the Cooper plaintiffs.
On March 10, 1997, the arbitrator ruled in favor of the eight plaintiffs
involved in the arbitration with respect to liability, finding that these eight
plaintiffs are entitled to
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<PAGE> 39
(i) compensation for the overtime hours they worked, (ii) an additional amount
equal to 30 days' compensation (in the case of the seven plaintiffs no longer
employed by the Company) as waiting time penalties for the Company's "willful"
failure to pay overtime compensation, (iii) interest on such unpaid compensation
and (iv) reasonable attorneys' fees and costs of arbitration. The arbitrator has
not yet made any determination with respect to calculation of damages. This
arbitration decision has no binding precedential or stare decisis effect on the
remaining 235 plaintiffs' cases. However, regardless of the outcome of the
damage phase of the arbitration, the Company may have to litigate, arbitrate or
settle the remaining cases and may incur significant legal expenses in
connection therewith, and the Company could be subject to significant
compensatory damages or settlement costs. In addition, there are approximately
700 store managers and associate store managers previously or currently employed
by the Company in California who have not brought or joined in the suit against
the Company as of the date hereof. Following the Alameda court's denial of class
certification to the plaintiffs, the court required the Company to send notice
in October 1995 to all potential plaintiffs (current and former managers as of
that date) notifying them of this action and providing them the opportunity to
contact the plaintiffs' attorney. The Company is currently conducting settlement
discussions with the 243 plaintiffs. Management is unable to predict the outcome
of the damage phase of the arbitration, the remaining lawsuits or the settlement
discussions, or the probability of additional lawsuits, at this time. However,
if a significant number of plaintiffs were to prevail on all elements of their
claims against the Company or if a significant number of additional current or
former managers were to bring suit and prevail as noted above, it could have a
material adverse effect on the Company.
From time to time, the Company has been and is involved in various other
legal proceedings. Management believes that such other litigation is routine in
nature and incidental to the conduct of its business, and that none of such
other litigation, if determined adversely to the Company, would have a material
adverse effect, individually or in the aggregate, on the Company.
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. Each director of the Company
will hold office until the next annual meeting of stockholders of the Company or
until his 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
the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
David H. Eisenberg........ 60 President, Chief Executive Officer and Chairman of the Board
Larry L. Buresh........... 52 Vice President -- Information Systems
Thomas A. Hough........... 44 Vice President -- Finance, Treasurer and Chief Financial
Officer
Mary M. Mahon............. 43 Vice President, General Counsel and Secretary
William V. Pantuso........ 45 Vice President -- Merchandising and Distribution
Paul F. Stevenson......... 47 Vice President -- Operations
Harold S. Eastman......... 57 Director
Stephen A. Kaplan......... 37 Director
Richard Masson............ 38 Director
</TABLE>
Officers are appointed to serve until the next annual meeting of the Board
of Directors, and until their successors have been appointed or elected and have
been qualified. They serve at the pleasure of the Board of Directors, subject to
any applicable employment agreements. Directors are elected to serve until the
next annual meeting of stockholders, and until their successors have been duly
elected and qualified.
David H. Eisenberg. Mr. Eisenberg joined the Company as President and Chief
Executive Officer in July 1992 and joined its Board of Directors as Chairman in
October 1992. Mr. Eisenberg was employed by Peoples Drug Stores Incorporated
from 1952 to 1991, holding various positions, most recently President and Chief
Operating Officer. From 1991 to July 1992, Mr. Eisenberg was President and Chief
Executive Officer of Eisenberg & Associates, Inc., a retail consulting firm.
37
<PAGE> 40
Larry L. Buresh. Mr. Buresh joined the Company as Vice
President -- Information Systems in August 1995. From December 1994 to July
1995, Mr. Buresh was a Senior Director at Sears Roebuck and Company in the
information systems department. Mr. Buresh was the Vice President, Information
Services and Distribution at Frank's Nursery and Crafts, Inc. from 1986 to
December 1994, and was a Vice President at Ben Franklin Stores, Inc. from 1981
to 1986.
Thomas A. Hough. Mr. Hough has served as Vice President -- Finance,
Treasurer and Chief Financial Officer of the Company since August 1993. From
November 1991 to August 1993, he was the Chief Financial Officer of Roy Rogers
Restaurants, a subsidiary of Hardees Food Systems Inc. From 1988 to 1990, Mr.
Hough served as Vice President -- Controller and then, from 1990 to 1991, as
Vice President -- Chief Financial Officer and Treasurer of Peoples Drug Stores
Incorporated. From 1975 to 1988, Mr. Hough served in positions in the audit and
consulting departments of Deloitte & Touche in Washington, D.C. and Baltimore,
Maryland.
Mary M. Mahon. Ms. Mahon has served as the Vice President, General Counsel
and Secretary of the Company since January 1993. From 1991 to 1993, Ms. Mahon
was in the private practice of law, prior to which she worked for 13 years in
various positions in the Legal Department at Peoples Drug Stores Incorporated
beginning as a staff attorney in 1978. From 1988 to 1991, Ms. Mahon served as
Executive Vice President, General Counsel and Secretary of Peoples Drug Stores
Incorporated.
William V. Pantuso. Mr. Pantuso has served as Vice
President -- Merchandising and Distribution of the Company since April 1994. Mr.
Pantuso joined the Company in March 1993 as Director of Inventory Management and
was named Director of Distribution and Inventory Management in October 1993.
Prior to joining the Company, Mr. Pantuso spent 20 years with Peoples Drug
Stores Incorporated in positions in store operations and marketing control
(pricing department and allocation/distribution) including Director of Marketing
Services from 1985 to 1989, Vice President of Sales Promotion/Merchandising from
1989 to 1991 and Vice President of Marketing for Hillcrest Sales, a division of
Peoples Drug Stores Incorporated, from 1991 to March 1993.
Paul F. Stevenson. Prior to joining the Company as Vice
President -- Operations in 1988, Mr. Stevenson served as West Coast Division
Manager for the Chief Auto Parts Division of Southland. Mr. Stevenson began his
employment with Southland in 1974, holding various operations and human resource
positions within Southland's Retail Store Group, including District Manager,
Zone Manager, Group Personnel Manager and Corporate Store Group Personnel
Manager.
Harold S. Eastman. Mr. Eastman has served as a director of the Company
since July 1994. Mr. Eastman is President of Peregrine Capital Co., an
investment group. From June 1989 until April 1992, Mr. Eastman held various
positions with McCaw Cellular Communications, Inc., including Vice Chairman and
President. Mr. Eastman acts as an advisor to various affiliates of Trust Company
of the West ("TCW"), including The Principal Fund.
Stephen A. Kaplan. Mr. Kaplan has served as a director of the Company since
June 1994. Mr. Kaplan is a principal of Oaktree. Prior to joining Oaktree in
June 1995, Mr. Kaplan was a Managing Director of TCW. Prior to joining TCW in
1993, Mr. Kaplan was a partner in the law firm of Gibson, Dunn & Crutcher. Mr.
Kaplan serves as a director of Decorative Home Accents, Inc., KinderCare
Learning Centers, Inc., Vision Hardware Group, Inc. and various private
companies.
Richard Masson. Mr. Masson has served as a director of the Company since
June 1994. Mr. Masson has been a principal of Oaktree since May 1995. From 1988
to May 1995, Mr. Masson was a partner of TCW Special Credits and Managing
Director of TCW and TCW Asset Management Company ("TAMCO"). Prior to joining TCW
in 1988, Mr. Masson was with the valuation advisory firm of Houlihan, Lokey,
Howard & Zukin, Inc. Mr. Masson serves as a director of Aureal Semiconductor,
Inc.
DIRECTOR COMPENSATION
Currently, the Company's directors receive no cash compensation for serving
on the Board, but directors are reimbursed for expenses reasonably incurred in
connection with their services as directors.
38
<PAGE> 41
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee (the "Audit Committee") and a
Compensation Committee (the "Compensation Committee"). The Audit Committee is
composed of Messrs. Eastman and Masson. The Audit Committee is responsible for
reviewing the scope of the independent auditors' examinations of the Company's
financial statements and receiving and reviewing their reports. The Audit
Committee also meets with the independent auditors, receives recommendations or
suggestions for changes in accounting procedures and initiates or supervises any
special investigations it may choose to undertake. The Compensation Committee is
composed of Messrs. Eastman, Eisenberg and Kaplan. The Compensation Committee
determines the Company's policy with respect to the nature and amount of all
compensation of the Company's executive officers, and administers the Company's
option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Mr. Eisenberg, a member of the Company's Compensation Committee, also
serves as the President and Chief Executive Officer of the Company.
The Company financed the purchase of shares of Common Stock pursuant to the
Management Stock Agreement for several of the Management Stockholders, including
Mr. Eisenberg. Mr. Eisenberg executed two Promissory Notes in favor of the
Company and pledged his shares of Common Stock as collateral for such Promissory
Notes pursuant to a stock pledge agreement. His Promissory Notes bear interest
at a rate of 7.05% per annum and mature on October 31, 2002. The maximum
aggregate principal amount outstanding in fiscal 1996 and as of December 29,
1996 on Mr. Eisenberg's Promissory Notes was $681,026 and $638,838,
respectively.
In connection with the Recapitalization, Mr. Eisenberg will repay 50% of
the principal amount outstanding at the date of the Recapitalization under his
Promissory Notes, which payment will equal $319,419, Mr. Eisenberg's shares of
Common Stock will continue to serve as collateral for the amounts remaining
outstanding under his Promissory Notes, including shares of Common Stock
acquired pursuant to the exercise of his options to buy shares of the Common
Stock. Mr. Eisenberg, subject to deferral under certain circumstances, will make
additional annual payments on his Promissory Notes equal to 15% of any cash
bonus paid to him in such year, excluding amounts paid in connection with the
Recapitalization and payments made pursuant to the Bonus Plan.
In connection with the Recapitalization, the Company will pay the bonuses
accrued through fiscal 1996 pursuant to the Bonus Plan. Mr. Eisenberg will
receive a bonus payment of $1.4 million. In addition, Mr. Eisenberg will receive
approximately $3.4 million of the $75.0 million to be distributed to the
stockholders of the Company in the Recapitalization. Mr. Eisenberg will use
$319,419 of such $3.4 million to repay a portion of the principal amount
outstanding under his Promissory Notes and $2.26 million of such $3.4 million to
exercise his outstanding options to purchase shares of the Common Stock. The
remaining $864,406 of such $3.4 million is a partial return of Mr. Eisenberg's
original investment in the Company.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation earned in fiscal 1996 by
the Company's Chief Executive Officer and each of the other four most highly
compensated executive officers whose remuneration exceeded
39
<PAGE> 42
$100,000 (the "Named Executive Officers"). The current compensation arrangements
for each of these officers are described in "Employment Arrangements" below.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION COMPENSATION
PRINCIPAL POSITION ($) ($) ($)(1)(2) ($)
------------------ ------- ------- ------------ ------------
<S> <C> <C> <C> <C>
David H. Eisenberg, 406,458 781,178(3) 19,200 9,047(4)
President and Chief Executive
Officer
Larry L. Buresh, 145,500 138,383(5) -- 51,658(6)
Vice President -- Information
Systems
Thomas A. Hough, 175,500 214,598(7) 10,200 2,015(4)
Vice President -- Finance and Chief
Financial Officer
Mary M. Mahon, 145,531 169,573(8) 10,200 1,855(4)
Vice President, General Counsel and
Secretary
Paul F. Stevenson, 167,667 178,373(9) 10,200 1,224(4)
Vice President -- Operations
</TABLE>
- ---------------
(1) These amounts were paid to the Named Executive Officers as a car allowance.
(2) Certain of the Company's executive officers receive perquisites and other
personal benefits in addition to salary, cash bonuses and other annual
compensation. The amounts of such perquisites and other personal benefits
are not shown because the aggregate amount of such compensation, if any, for
each of the Named Executive Officers during the 1996 fiscal year did not
exceed the lesser of $50,000 or 10% of total salary and bonus reported for
such executive officer.
(3) This amount includes $451,178 earned pursuant to the Chief Auto Parts Inc.
1994 Nonqualified Executive Target Bonus Plan.
(4) Amount paid on behalf of such officer for a term life insurance policy.
(5) This amount includes $85,183 earned pursuant to the Chief Auto Parts Inc.
1994 Nonqualified Executive Target Bonus Plan.
(6) This amount includes $1,821 paid on behalf of Mr. Buresh for a term life
insurance policy. This amount also includes $49,837 for expenses related to
Mr. Buresh's relocation, which the Company agreed to pay in connection with
Mr. Buresh's joining the Company.
(7) This amount includes $141,798 earned pursuant to the Chief Auto Parts Inc.
1994 Nonqualified Executive Target Bonus Plan.
(8) This amount includes $109,573 earned pursuant to the Chief Auto Parts Inc.
1994 Nonqualified Executive Target Bonus Plan.
(9) This amount includes $109,573 earned pursuant to the Chief Auto Parts Inc.
1994 Nonqualified Executive Target Bonus Plan.
Aggregate Option Exercises in 1996 and 1996 Year-End Option Values
The following table sets forth for the Named Executive Officers information
with respect to unexercised options and year-end option values, in each case
with respect to options to purchase shares of the Company's Common Stock. None
of such Named Executive Officers exercised any options during fiscal 1996. In
connection with the Recapitalization, the Company is accelerating the vesting of
all outstanding options, and all of the
40
<PAGE> 43
Named Executive Officers are expected to exercise their options. See "Principal
Stockholders" and "The Recapitalization."
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AS OF IN-THE-MONEY OPTIONS AT
DECEMBER 29, 1996(#) DECEMBER 29, 1996(1)
---------------------------- ----------------------------
NAME EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
---- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
David H. Eisenberg................... 794.49 794.49 $0 $0
Larry L. Buresh...................... 75 225 0 0
Thomas A. Hough...................... 249.69 249.69 0 0
Mary M. Mahon........................ 192.95 192.95 0 0
Paul F. Stevenson.................... 192.95 192.95 0 0
</TABLE>
- ---------------
(1) The Common Stock of the Company is not publicly traded. As a result, the
Company has decided to use $1,419.71 per share as the value of the Common
Stock underlying the unexercised options for the purpose of these
calculations. The value of the unexercised options is equal to the net per
share value of such Common Stock as of December 29, 1996 ($1,419.71), less
the applicable per share exercise price of the option ($1,419.71). The
Company determined the fair market value of the underlying Common Stock
using the same formula used to calculate the value of the Common Stock in
the Management Stock Agreements (as defined) pursuant to which, under
certain circumstances, the Company may purchase and certain stockholders
may sell shares of Common Stock to the Company. Using this formula, fair
market value (as defined) is computed assuming that the value of the
Company's aggregate Common Stock is equal to the sum of (A) the product of
Adjusted EBITDA (as defined in the Management Stock Agreement) for the four
fiscal quarters most recently completed as of December 29, 1996 multiplied
by a multiple of 5.0, (B) cash as of December 29, 1996 and (C) an amount
equal to the aggregate exercise price of all options and warrants then
outstanding less amounts that would be payable under the Bonus Plan had all
options outstanding under the 1994 Stock Option Plan been exercised less
(D) total indebtedness including capitalized leases as of December 29,
1996. Adjusted EBITDA for purposes of this calculation for the four fiscal
quarters most recently completed as of December 29, 1996 was $33.3 million
which would result in a pre-discount valuation of approximately $1,749 per
share. Because such amount is payable only upon certain circumstances
including death, disability or termination of employment, a discount of at
least 15%-25% appears appropriate, providing a range in value from $1,312
to $1,487 per share. As the option exercise price is $1,420 and is within
this range, the Company believes the option exercise price is the
appropriate price to use as the value of the Common Stock underlying the
options for purposes of the table.
Employment Arrangements
The Company has entered into an employment agreement with David H.
Eisenberg, the President and Chief Executive Officer of the Company effective
June 27, 1994. Mr. Eisenberg's employment agreement provides for a five year
term and for Mr. Eisenberg to serve as President and Chief Executive Officer of
the Company. The agreement provides for a base salary of $375,000 effective
January 1, 1995, subject to increase by the Board of Directors of the Company
and for yearly bonuses based on the Company's performance. The agreement also
provides that (i) upon a change of control (such that a party other than TCW or
an affiliate thereof, or an employee of the Company, becomes the holder of
equity securities of the Company representing more than 50% of the votes
entitled to elect the Board of Directors of the Company) or (ii) upon
termination of the agreement by the Company for any reason other than Mr.
Eisenberg's death or for cause, the Company will pay Mr. Eisenberg a cash amount
equal to the cost of an annuity that would provide a monthly payment of
$8,333.33 until his death. Such amount is reduced by the amount realizable
(after taxes) upon the sale of certain options granted to Mr. Eisenberg pursuant
to the 1994 Option Plan (as defined). The agreement also provides that if the
Company terminates the agreement for any reason other than death or for cause,
the Company will pay Mr. Eisenberg's salary for up to one year.
The Company has entered into an employment agreement with Larry L. Buresh,
the Vice President -- Information Systems of the Company effective August 10,
1995. Mr. Buresh's employment agreement provides for a three year term and for
Mr. Buresh to serve as Vice President -- Information Systems. The agreement
provides for an initial base salary of $140,000, subject to increase by the
Board of Directors of the Company and
41
<PAGE> 44
for yearly bonuses based on the Company's performance. The agreement provides
that if Mr. Buresh's employment is terminated for any reason other than for
cause (as defined in the agreement), the Company will pay Mr. Buresh's salary
for up to six months, relocation expenses or an additional month of base salary
(at Mr. Buresh's option), a prorated bonus and outplacement services.
Management Stock Purchases
In order to attract, retain and motivate selected employees, officers and
directors and to encourage such persons to devote their best efforts to the
business and financial success of the Company by providing for the purchase of
Common Stock, the Company implemented a management stock purchase plan. Pursuant
to certain stock purchase agreements (the "Management Stock Agreement"), the
Company granted each of the Company's executive officers and certain other
selected employees and Harold S. Eastman, a director of the Company
(collectively, the "Management Stockholders"), the right to purchase from the
Company up to an aggregate of 2,789.55 shares of Common Stock at a purchase
price of $1,419.71 per share. In addition, the Company agreed to finance each
Management Stockholder's, except for Mr. Eastman's, purchase of such Common
Stock to the extent desired by such Management Stockholder. Each Management
Stockholder who received financing from the Company executed one or more
promissory notes (the "Promissory Notes") to the Company and pledged his or her
shares of Common Stock as collateral for such Promissory Notes. In connection
with the Recapitalization, each Management Stockholder with amounts outstanding
under any Promissory Note will repay 50% of the principal amount outstanding on
the date of the Recapitalization under such Promissory Note. See "Certain
Transactions."
The Management Stock Agreement grants to each of the Company, The Principal
Fund and the Management Stockholders certain rights or obligations with respect
to the Common Stock upon the occurrence of particular events. The Management
Stock Agreement provides that, if a Management Stockholder ceases to be employed
by the Company or the Company is lawfully entitled to accelerate a Promissory
Note (a "Trigger Event"), the Company may elect to repurchase all of such
Management Stockholder's shares of Common Stock (a "Call Option"). If the
Company does not chose to exercise its Call Option, the Management Stockholder
may cause the Company to repurchase all of such Management Stockholder's shares
of Common Stock (a "Put Option"). The Management Stock Agreement also provides
for drag along/tag along rights, pursuant to which, in the event The Principal
Fund elects to sell its interest in the Company to an unaffiliated third party
(a "Purchaser"), (i) The Principal Fund may compel the Management Stockholders
to sell their shares of Common Stock to the Purchaser and (ii) the Management
Stockholders may require the Purchaser to purchase their shares of Common Stock,
in each case on the same terms and in the same fractional amount as The
Principal Fund proposes to sell its interest in the Company to such Purchaser.
In addition, the Management Stock Agreement provides the Management Stockholders
with the right, in certain situations, to require that the Company register a
number of the Management Stockholders' shares of Common Stock under the
Securities Act. Subject to certain conditions, Management Stockholders may, at
any time the Company proposes to register shares of the Common Stock under the
Securities Act, request that their shares of Common Stock be included in such
registration. In addition, subject to certain conditions, after the earlier of
an initial public offering of the Company's shares and August 1, 2002, the
holders of 50% of the aggregate number of shares of Common Stock subject to the
Management Stock Agreement may one time, upon written request, require that the
Company register their shares under the Securities Act.
1994 Executive Option Plan
The Company adopted the Chief Auto Parts Inc. 1994 Executive Option Plan
(the "1994 Option Plan") to attract, retain and motivate selected employees,
officers and directors and to encourage such persons to devote their best
efforts to the business and financial success of the Company by providing for
grants of options to purchase Common Stock. The 1994 Option Plan is administered
by the Compensation Committee of the Board of Directors. The Compensation
Committee determines the employees, officers and directors who will be granted
options, the number of options that each such person will be granted and the
terms, restrictions and conditions of such options (to the extent not
inconsistent with the 1994 Option Plan).
42
<PAGE> 45
The maximum number of shares of Common Stock subject to options and awards
under the 1994 Option Plan is 5,488.30 shares, subject to certain adjustments.
The 1994 Option Plan provides that the exercise price of each option is
$1,419.71 per share (subject to certain adjustments). Options become exercisable
in 25% increments: (i) on each anniversary of the date of grant if the grantee
is an employee or director of the Company on such date; (ii) on the date of
involuntary termination of employment or other relationship with the Company if
such termination is other than for cause; (iii) on the date of termination of
employment or other relationship with the Company on account of death or
permanent disability; or (iv) upon a change of control of the Company. Any
unvested options remaining after termination of a participant's employment or
other relationship or a change of control are terminated subject to the
reissuance of such options in accordance with the 1994 Option Plan. All
installments that become exercisable are cumulative and may be exercised at any
time after they become exercisable until the option expires. Options are not
transferable (other than by will, by the laws of descent or distribution, or
pursuant to a valid qualified domestic relations order).
Full payment for shares purchased upon exercise of an option must be made
at the time of exercise. The 1994 Option Plan provides that in certain
circumstances, an optionee may tender shares of Common Stock held by such
optionee for at least six months prior to the tender, in partial or full payment
of shares to be purchased upon exercise of an option. The Company's ability to
accept a tender of Common Stock is conditional upon and subject to (i) the
Company having sufficient funds legally available to purchase shares of Common
Stock, (ii) the ability of the Company to effect a purchase of Common Stock
under applicable law and (iii) any restrictions contained in the Company's
credit facilities or other debt instruments.
In addition, the 1994 Option Plan also contains restrictions on transfer,
incidental registration rights, required registration rights, a lock-up
agreement, drag-along and tag-along rights and put and call rights. However,
with respect to the tag-along rights and the put rights, the 1994 Option Plan
requires the grantee to hold the shares of Common Stock acquired pursuant to his
or her options for a period of six months before he or she may exercise such
rights.
Subject to certain limitations, the Board of Directors may amend, modify or
terminate the 1994 Option Plan. If not previously terminated, the 1994 Option
Plan terminates on June 30, 2004.
In connection with the Recapitalization, the Company will accelerate the
vesting of all outstanding options and all holders of outstanding options,
except Mr. Eastman, are expected to exercise such options.
1997 Employee Option Plan
In connection with the Recapitalization, the Company plans to adopt the
Chief Auto Parts Inc. 1997 Employee Option Plan (the "1997 Option Plan") to
attract, retain and motivate selected employees and to encourage such persons to
devote their best efforts to the business and financial success of the Company
by providing for grants of options to purchase Common Stock. The Company expects
that the 1997 Option Plan will be administered by the Compensation Committee of
the Board of Directors and will contain terms substantially conforming to the
following description. The Compensation Committee will determine the employees
who will be granted options, the number of options that each such person will be
granted and the terms, restrictions and conditions of such options (to the
extent not inconsistent with the 1997 Option Plan).
The maximum number of shares of Common Stock subject to options and awards
under the 1997 Option Plan will be 1,000 shares, subject to certain adjustments.
The 1997 Option Plan will provide that the exercise price of each option will be
set by the Compensation Committee of the Board of Directors at the time of
granting of such option. Options will become exercisable in 25% increments (i)
on each anniversary of the date of grant if the grantee is an employee of the
Company on such date, (ii) on the date of involuntary termination of employment
with the Company if such termination is other than for cause, (iii) on the date
of termination of employment with the Company on account of death or permanent
disability or (iv) upon a change of control of the Company. Any unvested options
remaining after termination of a participant's employment or other relationship
or a change of control will be terminated subject to the reissuance of such
options in accordance with the 1997 Option Plan. All installments that become
exercisable will be cumulative and may be exercised at any time after they
become exercisable until the option expires. Options will not be transferable
(other than by will, by the laws of descent or distribution, or pursuant to a
valid qualified domestic relations order). The 1997 Option
43
<PAGE> 46
Plan will require that full payment for shares purchased upon exercise of an
option be made at the time of exercise.
Subject to certain limitations, the Board of Directors will have the power
to amend, modify or terminate the 1997 Option Plan. If not previously
terminated, the 1997 Option Plan is expected to terminate on May 31, 2007.
Executive Target Bonus Plan
The Company adopted the Chief Auto Parts Inc. 1994 Executive Target Bonus
Plan (the "Bonus Plan") to attract and maintain the services of quality
management talent by rewarding certain employees for the sustained creation of
stockholder value. The Bonus Plan is administered by the Compensation Committee,
which determines the participants in the Bonus Plan, all of whom are members of
management of the Company. The terms of the Bonus Plan specify that accrued
bonuses are payable when a participant exercises options to purchase shares of
Common Stock. As a result, the exercise of options by certain management
stockholders in connection with the Recapitalization will result in the payment
of $4.0 million in cash bonuses, all of which was accrued on the Company's
financial statements as of December 29, 1996.
With respect to future bonuses, the Bonus Plan will provide for the payment
of cash bonuses to the extent that the Company achieves certain financial
targets based on the Company's EBITDA (as defined in the Bonus Plan) for fiscal
1997 and 1998. The EBITDA targets are $37.0 million and $41.0 million for fiscal
1997 and fiscal 1998, respectively. If the Company attains the EBITDA targets
for fiscal 1997 and fiscal 1998, the estimated aggregate amount payable under
the Bonus Plan would be $3.0 million.
Executive Retirement Plan
The Company adopted the Chief Auto Parts Inc. Nonqualified Executive
Retirement Plan (the "Retirement Plan") to provide certain of its highly
compensated and management employees with a mechanism through which to defer
part of their annual compensation on a pre-tax basis. The Retirement Plan is
unfunded and any funds accumulated are for the purpose of providing benefits
under the Retirement Plan and are fully available to satisfy the claims of the
Company's creditors. The Retirement Plan is administered by a plan committee,
which determines the participants in the Retirement Plan. Subject to certain
limitations, the Board of Directors may amend, modify or terminate the
Retirement Plan.
Each participant in the Retirement Plan may choose to contribute between 1%
and 20% of his or her annual salary to a salary deferral contribution account.
The Retirement Plan provides for a discretionary matching contribution as
determined by the Board of Directors. No such contribution was made for fiscal
1996. To the extent that a matching contribution is made, each participant vests
in 20% of his or her matching contribution account for each year of service by
such participant. In the event of a change of control of the Company, each
participant will fully vest in his or her matching contribution account.
The Company established the Nonqualified Executive Retirement Trust (the
"Retirement Trust") to hold the assets of the Retirement Plan, subject to the
claims of the Company's general creditors. In addition, the Retirement Trust
will also distribute benefits in accordance with the terms of the Retirement
Plan. Upon a change of control of the Company, the Company must contribute to
the Retirement Trust at the end of the then current calendar year such amount as
is needed in order for the Retirement Trust's assets to equal the account
balances of the Retirement Plan participants.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law (the "DGCL") authorizes
a Delaware corporation to include a provision in its certificate of
incorporation limiting or eliminating the personal liability of its directors to
the corporation and its stockholders for monetary damages for breach of the
directors' fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Absent the
limitations authorized by such provision, directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Although
Section 102 of the DGCL
44
<PAGE> 47
does not change a director's duty of care, it enables corporations to limit
available relief to equitable remedies such as injunction or rescission. The
Company's Fourth Restated Certificate of Incorporation and By-laws include
provisions which limit or eliminate the personal liability of its directors to
the fullest extent permitted by Section 102 of the DGCL. Consequently, a
director will not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for (i) any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases, redemptions, or other distributions and (iv) any transaction
from which the director derived an improper personal benefit.
The Company's Fourth Restated Certificate of Incorporation and By-laws also
provide, in effect, that, to the fullest extent and under the circumstances
permitted by Section 145 of the DGCL, the Company will 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, by reason of the fact that he or she is or was a director,
officer, employee or agent of the Company or is or was serving at the request of
the Company as a director, officer, employee or agent of another corporation or
enterprise. The inclusion of these indemnification provisions in the Company's
Fourth Restated Certificate of Incorporation and By-laws is intended to enable
the Company to attract qualified persons to serve as directors, officers,
employees and agents who might otherwise be reluctant to do so.
Depending upon the character of the proceeding, the Company may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with any action,
suit or proceeding if the person indemnified acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interest of
the Company, and with respect to any criminal action or proceeding, had no cause
to believe his or her conduct was unlawful. To the extent that a director,
officer, employee or agent of the Company has been successful in the defense of
any action, suit or proceeding referred to above, the Company shall indemnify
him or her against expenses (including attorneys' fees) actually and reasonably
incurred in connection therewith.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock, as of the date hereof, after giving effect to the
Recapitalization, by (i) each person known by the Company to be the beneficial
owner of more than 5% of the outstanding shares of Common Stock, (ii) each
director and executive officer of the Company who beneficially owns Common Stock
and (iii) all directors and executive officers of the Company as a group. Unless
otherwise indicated, each of the stockholders shown in the table below has sole
voting and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME(1) SHARES(2) OF CLASS
------- ---------- --------
<S> <C> <C>
The TCW Group, Inc.(3)...................................... 47,210.45 86.2%
TAMCO(4).................................................... 45,605.30 83.3
Oaktree Capital Management LLC(5)........................... 42,489.41 77.6
The Principal Fund.......................................... 42,489.41 77.6
Trust Company of the West(6)................................ 1,605.15 2.9
General Electric Capital Corporation(7)..................... 5,689.50 9.4
David H. Eisenberg(8)....................................... 2,651.78 4.8
Larry L. Buresh(9).......................................... 400.00 *
Thomas A. Hough(10)......................................... 819.74 1.5
Mary M. Mahon(11)........................................... 626.48 1.1
William V. Pantuso(12)...................................... 511.70 *
Paul F. Stevenson(13)....................................... 596.83 1.1
Harold S. Eastman(14)....................................... 554.89 1.0
Stephen A. Kaplan(15)....................................... 42,489.41 77.6
Richard Masson(16).......................................... 47,210.45 86.2
All directors and executive officers as a group
(9 persons)(17)........................................... 53,371.87 95.6%
</TABLE>
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<PAGE> 48
- ---------------
* Less than 1%.
(1) The address of The TCW Group, Inc., TAMCO, Trust Company of the West and
The Principal Fund is 865 South Figueroa Street, Los Angeles, California
90017. The address of Oaktree, Mr. Kaplan and Mr. Masson is 550 South Hope
Street, 22nd Floor, Los Angeles, California 90071. The address of General
Electric Capital Corporation is 292 Long Ridge Road, Stamford, Connecticut
06927. The address of Messrs. Eisenberg, Buresh, Hough, Pantuso and
Stevenson and Ms. Mahon is c/o Chief Auto Parts Inc., One Lincoln Centre,
Suite 200, 5400 LBJ Freeway, Dallas, Texas 75240-6223. The address of Mr.
Eastman is c/o Peregrine Capital Co., 101 South Capitol Boulevard, Suite
1502, Boise, Idaho 83702.
(2) As used in the table above, a beneficial owner of a security includes any
person who, directly or indirectly, through contract, arrangement,
understanding, relationship, or otherwise has or shares (i) the power to
vote, or direct the voting, of such security or (ii) investment power which
includes the power to dispose, or to direct the disposition of, such
security. In addition, a person is deemed to be the beneficial owner of a
security if that person has the right to acquire beneficial ownership of
such security within 60 days.
(3) All such shares are owned by The Principal Fund (42,489.41 shares), TCW
Special Credits Fund IV (1,510.73 shares), TCW Special Credits Plus Fund
(1,605.16 shares), TCW Special Credits Trust IV (1,274.68 shares) and TCW
Special Credits Trust IVA (330.47 shares), all of which are managed by
affiliates of The TCW Group, Inc.
(4) All such shares are owned by The Principal Fund (42,489.41 shares), TCW
Special Credits Fund IV (1,510.73 shares) and TCW Special Credits Plus Fund
(1,605.16 shares). TAMCO, which is a wholly owned subsidiary of The TCW
Group, Inc., is the general partner of each of The Principal Fund, TCW
Special Credits Fund IV and TCW Special Credits Plus Fund and is managing
general partner of TCW Special Credits.
(5) All such shares are owned by The Principal Fund. Pursuant to a subadvisory
agreement with TAMCO, Oaktree manages the investments and assets of The
Principal Fund.
(6) All such shares are owned by TCW Special Credits Trust V (1,274.68 shares)
and TCW Special Credits IVA (330.47) shares. Trust Company of the West, a
wholly owned subsidiary of The TCW Group, Inc. is the trustee of TCW
Special Credits Trust IV and TCW Special Credits Trust IVA.
(7) All such shares represent shares subject to warrants that are currently
exercisable and are beneficially owned by the named stockholder.
(8) Includes (i) options to purchase 1,588.98 shares of Common Stock, all of
which will be exercised in connection with the Recapitalization and (ii)
warrants to purchase 125.3 shares of Common Stock.
(9) Includes options to purchase 300 shares of Common Stock, all of which will
be exercised in connection with the Recapitalization.
(10) Includes (i) options to purchase 499.39 shares of Common Stock, all of
which will be exercised in connection with the Recapitalization and (ii)
warrants to purchase 25.7 shares of Common Stock.
(11) Includes (i) options to purchase 385.90 shares of Common Stock, all of
which will be exercised in connection with the Recapitalization and (ii)
warrants to purchase 12.9 shares of Common Stock.
(12) Includes (i) options to purchase 317.80 shares of Common Stock, all of
which will be exercised in connection with the Recapitalization and (ii)
warrants to purchase 6.4 shares of Common Stock.
(13) Includes (i) options to purchase 385.90 shares of Common Stock, all of
which will be exercised in connection with the Recapitalization and (ii)
warrants to purchase 36.6 shares of Common Stock.
(14) Includes options to purchase 443.91 shares of Common Stock, none of which
will be exercised in connection with the Recapitalization.
(15) All such shares are owned by The Principal Fund and are also shown as
beneficially owned by Oaktree. To the extent Mr. Kaplan, on behalf of
Oaktree, participates in the process to vote or dispose of any such shares,
he may be deemed under such circumstances for the purpose of Section 13 of
the Exchange Act to be the beneficial owner of such shares. Mr. Kaplan
disclaims beneficial ownership of such shares.
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<PAGE> 49
(16) All such shares are also shown as beneficially owned by The TCW Group,
Inc., 42,489.41 of which are also shown as beneficially owned by Oaktree
and 45,605.30 of which are also shown as beneficially owned by TAMCO. To
the extent, Mr. Masson, on behalf of Oaktree or TAMCO, as applicable,
participates in the process to vote or dispose of any such shares, he may
be deemed under such circumstances for the purpose of Section 13 of the
Exchange Act to be the beneficial owner of such shares. Mr. Masson
disclaims beneficial ownership of such shares.
(17) See Notes (8)-(16).
CERTAIN TRANSACTIONS
During 1993, the Company entered into an escrow agreement with Mr. Hough in
connection with his employment agreement, pursuant to which the Company held
$100,000 in escrow for Mr. Hough, which he would be entitled to receive upon the
termination of his employment in certain circumstances. Mr. Hough's employment
agreement expired in August 1996 and the escrow agreement was terminated (and
the escrowed funds were returned to the Company) by mutual agreement of the
parties in April 1996.
The Company financed the purchase of shares of Common Stock pursuant to the
Management Stock Agreement for several of the Management Stockholders, including
each of the Named Executive Officers. Each Management Stockholder who received
financing from the Company (each a "Promissor") executed Promissory Notes in
favor of the Company and pledged his or her shares of Common Stock as collateral
for such Promissory Notes pursuant to a stock pledge agreement. All of the
Promissory Notes bear interest at a rate of 7.05% per annum and mature on
October 31, 2002, except for Mr. Buresh's Promissory Note, which bears interest
at the rate of 6.11% per annum and matures on November 14, 2003. The maximum
aggregate principal amount outstanding in fiscal 1996 on the Promissory Notes
for David H. Eisenberg, Larry L. Buresh, Thomas A. Hough, Mary M. Mahon, William
V. Pantuso and Paul F. Stevenson was $681,026, $94,647, $241,617, $181,755,
$151,734 and $114,251, respectively. As of December 29, 1996, the aggregate
principal amount outstanding on the Promissory Notes for Messrs. Eisenberg,
Buresh and Hough, Ms. Mahon, and Messrs. Pantuso and Stevenson was $638,838,
$88,347, $230,292, $173,185, $143,364 and $103,286, respectively.
In connection with the Recapitalization, each Promissor will repay 50% of
the principal amount outstanding at the date of the Recapitalization under his
or her respective Promissory Notes, which payments will equal $319,419, $44,174,
$115,146, $86,593, $71,682 and $51,643 for Messrs. Eisenberg, Buresh and Hough,
Ms. Mahon, and Messrs. Pantuso and Stevenson, respectively. Each Promissor's
shares of Common Stock will continue to serve as collateral for the amounts
remaining outstanding under his or her respective Promissory Notes, including
shares of Common Stock acquired pursuant to the exercise of such Promissor's
options to buy shares of the Common Stock. Each of Messrs. Eisenberg, Buresh,
Hough, Pantuso and Stevenson and Ms. Mahon, subject to deferral under certain
circumstances, will make additional annual payments on his or her Promissory
Notes equal to 15% of any cash bonus paid to such person in such year, excluding
amounts paid in connection with the Recapitalization and payments made pursuant
to the Bonus Plan. See "Management -- Management Stock Purchases."
In connection with the Recapitalization, the Company will pay the bonuses
accrued through fiscal 1996 pursuant to the Bonus Plan. This will result in the
payment of $4.0 million in cash bonuses, all of which was accrued on the
Company's audited financial statements as of December 29, 1996. In connection
with the Recapitalization, David H. Eisenberg, Larry L. Buresh, Thomas A. Hough,
Mary M. Mahon, William V. Pantuso and Paul F. Stevenson will receive bonus
payments of $1.4 million, $127,774, $425,393, $328,720, $270,710 and $328,720,
respectively. See "The Recapitalization" and "Management -- Executive Target
Bonus Plan."
Pursuant to the Recapitalization, Messrs. Eisenberg, Buresh and Hough, Ms.
Mahon and Messrs. Pantuso and Stevenson are estimated to receive, net of taxes
and amounts paid back to the Company in payment for the exercise of options or
amounts repaid under the Promissory Notes, an aggregate of approximately $1.3
million, $100,000, $400,000, $300,000, $300,000 and $300,000, respectively.
It is the policy of the Company to engage in transactions with affiliated
parties only on terms that, in the opinion of the Company, are no less favorable
to the Company than could be obtained with non-affiliated parties, and each of
the transactions described above conforms to that policy.
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<PAGE> 50
DESCRIPTION OF NEW CREDIT FACILITY
GENERAL
As part of the Recapitalization, the Company will enter into the New Credit
Facility with Heller Financial, Inc., as agent. The New Credit Facility will
consist of a revolving credit facility in an aggregate principal amount of
$100.0 million (the "Loans") and will mature on May 28, 2002.
Indebtedness under the New Credit Facility will be secured by a first
priority security interest upon (i) all of the Company's existing and
after-acquired inventory and accounts receivable and such inventory and accounts
of each of its direct and indirect material subsidiaries, if any, and proceeds
thereof and (ii) all general intangibles and other intangible assets (including,
without limitation, trademarks and tradenames but not including real property)
of the Company and such material subsidiaries, if any, and proceeds thereof.
REVOLVING CREDIT FACILITY
The New Credit Facility will consist of a revolving credit facility in an
aggregate principal amount of $100.0 million. The Company will be entitled to
draw amounts under the New Credit Facility, subject to availability pursuant to
a borrowing base formula based upon eligible inventory levels, in order to meet
the Company's working capital requirements and for general corporate purposes.
The New Credit Facility includes a $10.0 million sub-limit for Letters of Credit
and a $10.0 million sub-limit for swing line loans ("Swing Line Loans")
available on same-day notice.
INTEREST RATES
Interest will accrue on the Loans with reference to the base rate (the
"Base Rate") plus the applicable interest margin. The Company may elect that all
or a portion of the Loans, other than Swing Line Loans, bear interest at the
Eurodollar rate (the "Eurodollar Rate") plus the applicable interest margin. The
Base Rate is defined as, on any date, the higher of (i) the Federal Funds Rate,
as published by the Federal Reserve Bank of New York, plus 1/2 of 1% or (ii) the
prime commercial lending rate in effect from time to time as announced by Chase
Manhattan Bank, NA, and two other reference institutions. The Eurodollar Rate is
defined as an amount equal to (i) the rate posted on the Reuters Screen LIBO
Page (if only a single rate is posted by Reuters), (ii) the arithmetic mean of
offered rates on the Reuters Screen LIBO Page (if two or more such offered rates
are posted by Reuters) or (iii) the average of offered rates (only in the event
that Reuters ceases to provide LIBOR quotations). The applicable interest margin
during the first six months following the closing date of the New Credit
Facility will be 0.5% for Base Rate loans and 2.0% for Eurodollar Rate loans.
After such first six months, the applicable interest margin will fluctuate
between 0.0% and 1.0% for Base Rate loans and between 1.5% and 2.5% for the
Eurodollar Rate loans, based on the leverage ratio of the Company.
MANDATORY AND OPTIONAL PREPAYMENT
The New Credit Facility will not contain any mandatory prepayment
provisions as long as the aggregate amount of the Loans does not exceed the
level of availability under the New Credit Facility. The New Credit Facility
will provide that the Company may prepay Loans in whole or in part without
penalty, subject to reimbursement of the lender's breakage and redeployment
costs in the case of prepayment of Eurodollar Rate loans.
COVENANTS
The New Credit Facility will contain certain covenants and other
requirements of the Company and its subsidiaries. In general, the affirmative
covenants will provide for mandatory reporting by the Company of financial and
other information to the agent and notice by the Company to the agent upon the
occurrence of certain events.
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<PAGE> 51
The New Credit Facility will also contain certain negative covenants and
restrictions on actions by the Company including, without limitation,
restrictions on indebtedness, liens, guarantee obligations, mergers, asset
dispositions not in the ordinary course of business, investments, loans,
advances, dividends and other restricted junior payments, transactions with
affiliates, sale and leaseback transactions and prepayment, entering other lines
of business and amendments of other indebtedness. The New Credit Facility will
require the Company to meet certain financial covenants including minimum EBITDA
(as defined in the New Credit Facility) and minimum fixed charge coverage ratio.
EVENTS OF DEFAULT
The New Credit Facility will specify certain customary events of default
including, without limitation, 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, and
unenforceability of certain documents under the New Credit Facility. The events
of default under the New Credit Facility are substantially similar to the events
of default under the Indenture except as follows: (i) the Company's failure to
pay other indebtedness or judgments entered against the Company, including
failure to pay amounts due with respect to the Notes, will trigger a
cross-default under the New Credit Facility at lower dollar amounts than in the
Indenture; (ii) the creation of liens on or failure of any security interest in
collateral securing the New Credit Facility will trigger a default under the New
Credit Facility; (iii) the insolvency or dissolution of the Company will trigger
a default under the New Credit Facility; (iv) a Change of Control that triggers
the Company's repurchase obligations under the Indenture will trigger a default
under the New Credit Facility; (v) payment by the Company with respect to
certain pending legal proceedings of more than $5.0 million in excess of the
Company's reserve for such liabilities will trigger an event of default under
the New Credit Facility; and (vi) the occurrence of certain events (such as
damage or loss of property, labor strikes or acts of God) causing a material
adverse change in the Company's business could trigger a default under the New
Credit Facility. The definition of Change of Control is the same in the New
Credit Facility as in the Indenture.
The description of the New Credit Facility set forth above is qualified in
its entirety to the complete text of the documents entered into or to be entered
into therewith. A form of the New Credit Facility has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
DESCRIPTION OF THE NOTES
GENERAL
The Notes are to be issued under an Indenture, to be dated as of May 28,
1997 (the "Indenture"), between the Company and First Trust National
Association, as Trustee (the "Trustee").
The following is a summary of the material provisions of the Indenture and
the Notes, a copy of which Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following summary of certain
provisions of the Indenture and the Notes is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture and the Notes,
including the definitions of certain terms therein and those terms made a part
thereof by the Trust Indenture Act of 1939, as amended (the "TIA"). As used in
this "Description of the Notes" section, references to the "Company" include
only Chief Auto Parts Inc. and not its Subsidiaries. The definitions of certain
capitalized terms used in the following summary are set forth below under
"-- Certain Definitions."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee's agent at First Trust New York,
100 Wall Street, 20th Floor, New York, NY 10005), except that, at the option of
the Company, payment of interest may be made by check mailed to the address of
the Holders as such address appears in the Note register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration or exchange of Notes, but the Company may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
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<PAGE> 52
TERMS OF THE NOTES
The Notes will be unsecured senior obligations of the Company, limited to
$130.0 million aggregate principal amount, and will mature on May 15, 2005. The
Notes will bear interest at the rate per annum shown on the cover page hereof
from May 28, 1997, or from the most recent date to which interest has been paid
or provided for, payable semiannually to Holders of record at the close of
business on the May 1 or November 1 immediately preceding the interest payment
date on May 15 and November 15 of each year, commencing November 15, 1997. The
Company will pay interest on overdue principal and, to the extent permitted by
law, on overdue installments of interest at the rate of interest borne by the
Notes. Interest on the Notes will be computed on the basis of a 360-day year of
twelve 30-day months.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to May 15, 2001. On and after such
date, the Notes will be redeemable, at the Company's option, in whole or in
part, at any time or from time to time, upon not less than 30 nor more than 60
days' prior notice mailed by first-class mail to each Holder's registered
address, at the following redemption prices (expressed in percentages of
principal amount), plus accrued and unpaid interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed during
the 12-month period commencing on May 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------ ----------
<S> <C>
2001........................................................ 105.250%
2002........................................................ 102.625
2003 and thereafter......................................... 100.000
</TABLE>
In addition, at any time and from time to time on or prior to May 15, 2000,
the Company may redeem in the aggregate up to 36% of the principal amount of the
Notes with the proceeds of one or more Public Equity Offerings, at a redemption
price (expressed as a percentage of principal amount) of 110.5% plus accrued and
unpaid interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that at least 64% of the original
aggregate principal amount of the Notes must remain outstanding after each such
redemption.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
RANKING
The indebtedness evidenced by the Notes will be senior unsecured
obligations of the Company ranking pari passu with other senior unsecured
Indebtedness of the Company and senior to all Subordinated Obligations. The
Notes will also be effectively subordinated to all senior secured Indebtedness
(including Indebtedness under the New Credit Facility) of the Company to the
extent of the value of the assets securing such indebtedness.
As of March 30, 1997, after giving pro forma effect to the Recapitalization
as if it had occurred on such date, the aggregate amount of senior Indebtedness
of the Company other than the Notes that would have been outstanding would have
been approximately $9.1 million (excluding unused commitments of approximately
$92.8 million under the New Credit Facility, of which approximately $70.0
million would have then been eligible for borrowing thereunder), all of which is
senior secured Indebtedness. As of March 30, 1997, after giving pro forma effect
to the Recapitalization as if it had occurred on such date, the aggregate amount
of secured indebtedness of the Company, to which the Notes would be effectively
subordinated, would have been $9.1 million and the Company would have had $74.7
million of outstanding indebtedness ranking pari passu
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<PAGE> 53
with the Notes (consisting of trade accounts payable made in the ordinary course
of business). Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company may incur, under certain circumstances
the amount of such Indebtedness could be substantial and, in any case, such
Indebtedness may be senior Indebtedness and may be secured. See "-- Certain
Covenants -- Limitation on Indebtedness," "-- Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries" and "-- Limitation on Liens."
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 50% of the
total voting power of the then outstanding Voting Stock of the Company;
(ii) during any period of two consecutive years commencing after the
Company's initial Public Equity Offering, individuals who at the beginning
of such period constituted the Board of Directors (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the shareholders of the Company was approved by a vote of
66 2/3% of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (in each case other than a Person that is controlled by the
Permitted Holders), and, in the case of any such merger or consolidation,
the securities of the Company that are outstanding immediately prior to
such transaction and which represent 100% of the aggregate voting power of
the Voting Stock of the Company are changed into or exchanged for cash,
securities or property, unless pursuant to such transaction such securities
are changed into or exchanged for, in addition to any other consideration,
securities of the surviving corporation or a parent corporation that owns
all of the capital stock of such corporation that represent immediately
after such transaction, at least 50% of the aggregate voting power of the
Voting Stock of the surviving corporation or such parent corporation, as
the case may be.
Within 30 days following any Change of Control, unless notice of redemption
of the Notes has been given pursuant to the provisions of the Indenture
described under "-- Optional Redemption" above, the Company shall mail a notice
to the Trustee and to each Holder stating: (1) that a Change of Control has
occurred and that such Holder has the right to require the Company to purchase
such Holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
repurchase (subject to the right of holders of record on the relevant record
date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control; (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its Notes repurchased.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to the Change of
Control provisions of the Indenture. To the extent that the provisions of any
securities laws or regulations conflict with the Change of Control provisions of
the Indenture, the Company shall comply with the
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<PAGE> 54
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the Change of Control provisions of the Indenture
by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of Indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "-- Certain Covenants -- Limitation on Indebtedness"
and "-- Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries." Such restrictions can only be waived with the consent of the
Holders of a majority in principal amount of the Notes then outstanding. Except
for the limitations contained in such covenants, however, the Indenture will not
contain any covenants or provisions that may afford Holders protection in the
event of a highly leveraged transaction.
If a Change of Control offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be delivered by Holders seeking to accept the Change of
Control offer. The failure of the Company to make or consummate the Change of
Control offer or pay the purchase price when due will give the Trustee and the
Holders the rights described under "-- Defaults."
The existence of a Holder's right to require the Company to offer to
repurchase such Holder's Notes upon a Change of Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repaid or repurchased upon a Change of Control.
Moreover, the exercise by the Holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
Holders following the occurrence of a Change of Control may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. The provisions under the Indenture relating to the Company's
obligation to make an offer to repurchase the Notes as a result of a Change of
Control may be waived or modified with the written consent of the Holders of a
majority in principal amount of the Notes.
SINKING FUND
There will be no mandatory sinking fund for the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not Incur, directly or
indirectly, any Indebtedness unless, on the date of such Incurrence, the
Consolidated Coverage Ratio exceeds 2.0 to 1.0 if such Indebtedness is Incurred
from the Issue Date through May 15, 1999, and 2.25 to 1.0 if such Indebtedness
is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company may Incur any
or all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the
New Credit Facility (and any guarantees thereof) or any other credit facility in
a principal amount which, when taken together with all letters of credit and the
principal amount of all other Indebtedness Incurred pursuant to this clause (1)
and then outstanding, does not exceed the greater of (x) $100 million or (y) the
sum of (A) 75% of the net book value of the inventory of the Company and its
Restricted Subsidiaries and (B) 80% of the net book value of the accounts
receivables of the Company and its Restricted Subsidiaries; (2) Indebtedness
owed to and held by a Wholly Owned Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock which results in any such
Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any
subsequent transfer of such Indebtedness (other than to another
52
<PAGE> 55
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the Company; (3) the Notes; (4) Indebtedness
outstanding on the Issue Date (other than Indebtedness described in clause (1),
(2) or (3) of this covenant); (5) Refinancing Indebtedness in respect of
Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (3) or (4)
or this clause (5) or pursuant to the covenant described under "-- Limitation on
Indebtedness and Preferred Stock of Restricted Subsidiaries" below; (6) Hedging
Obligations consisting of Interest Rate Agreements directly related to
Indebtedness permitted to be Incurred by the Company pursuant to the Indenture;
(7) Indebtedness of the Company consisting of obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of assets by
the Company or any Restricted Subsidiary permitted under the Indenture; (8)
Capital Lease Obligations in an aggregate principal amount not exceeding $15
million at any one time outstanding; (9) Attributable Debt of the Company with
respect to Sale/Leaseback Transactions in an aggregate principal amount not to
exceed $5 million; and (10) Indebtedness in an aggregate principal amount which,
together with all other Indebtedness of the Company outstanding on the date of
such Incurrence (other than Indebtedness permitted by clauses (1) through (9)
above or paragraph (a)), does not exceed $15 million at any one time
outstanding.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Notes to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with the covenant entitled
"-- Limitation on Indebtedness," (i) in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described
above, the Company, in its sole discretion, will classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be
divided and classified in more than one of the types of Indebtedness described
above.
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries.
The Company shall not permit any Restricted Subsidiary to Incur, directly or
indirectly, any Indebtedness or Preferred Stock except:
(a) Indebtedness or Preferred Stock issued to and held by the Company
or a Wholly Owned Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock which results in any such Wholly
Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness or Preferred Stock (other than to the Company
or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the issuance of such Indebtedness or Preferred Stock by the issuer thereof;
(b) Indebtedness or Preferred Stock of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness or
Preferred Stock Incurred in connection with, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by the
Company); provided, however, that on the date of such acquisition and after
giving effect thereto, the Company would have been able to Incur at least
$1.00 of additional Indebtedness pursuant to clause (a) of the covenant
described under "-- Limitation on Indebtedness";
(c) Indebtedness or Preferred Stock outstanding on the Issue Date
(other than Indebtedness or Preferred Stock described in clause (a) or (b)
of this paragraph) and Indebtedness under the New Credit Facility;
(d) Indebtedness of any Restricted Subsidiary consisting of
obligations in respect of purchase price adjustments in connection with the
acquisition or disposition of assets by the Company or any Restricted
Subsidiary permitted under the Indenture;
(e) Preferred Stock which is not Disqualified Stock; provided,
however, that such Restricted Subsidiary shall not pay cash dividends on
such Preferred Stock; and
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(f) Refinancing Indebtedness Incurred in respect of Indebtedness or
Preferred Stock referred to in clause (b) or (c) of this paragraph or this
clause (f); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness or Preferred
Stock of a Restricted Subsidiary described in clause (b), such Refinancing
Indebtedness shall be Incurred only by such Restricted Subsidiary.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien upon any of its property or assets, now owned or hereafter acquired,
securing any obligation unless concurrently with the creation of such Lien
effective provision is made to secure the Notes equally and ratably with such
obligation for so long as such obligation is so secured; provided, that if such
obligation is a Subordinated Obligation, the Lien securing such obligation shall
be subordinated and junior to the Lien securing the Notes with the same or
lesser relative priority as such Subordinated Obligation shall have been with
respect to the Notes. The preceding restriction shall not require the Company or
any Restricted Subsidiary to secure the Notes if the Lien consists of the
following:
(a) Liens created by the Indenture, Liens under the New Credit
Facility and Liens existing as of the Issue Date;
(b) Permitted Liens;
(c) Liens to secure Indebtedness issued by the Company for the purpose
of financing all or a part of the purchase price of assets or property
acquired or constructed in the ordinary course of business after the Issue
Date; provided, however, that (a) the aggregate principal amount (or
accreted value in the case of Indebtedness issued at a discount) of
Indebtedness so issued shall not exceed the lesser of the cost or fair
market value, as determined in good faith by the Board of Directors of the
Company, of the assets or property so acquired or constructed, (b) the
Indebtedness secured by such Liens shall have been permitted to be Incurred
under the "-- Limitation on Indebtedness" covenant and (c) such Liens
shall not encumber any other assets or property of the Company or any of
its Restricted Subsidiaries other than such assets or property or any
improvement on such assets or property and shall attach to such assets or
property within 90 days of the construction or acquisition of such assets
or property;
(d) Liens on the assets or property of a Restricted Subsidiary
existing at the time such Restricted Subsidiary becomes a Restricted
Subsidiary and not issued as a result of (or in connection with or in
anticipation of) such Restricted Subsidiary becoming a Restricted
Subsidiary; provided, however, that such Liens do not extend to or cover
any other property or assets of the Company or any of its other Restricted
Subsidiaries;
(e) Liens securing Capital Lease Obligations Incurred in accordance
with the "-- Limitation on Indebtedness" covenant;
(f) Liens with respect to Sale/Leaseback Transactions permitted by
clause (b)(9) of the "-- Limitation on Indebtedness" covenant;
(g) Liens securing Indebtedness issued to Refinance Indebtedness which
has been secured by a Lien permitted under the Indenture and is permitted
to be Refinanced under the Indenture; provided, however, that such Liens do
not extend to or cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced; or
(h) Liens on assets of the Company or any of its Restricted
Subsidiaries securing Indebtedness in an aggregate principal amount not to
exceed $5.0 million.
Limitation on Sale/Leaseback Transactions. The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Restricted Subsidiary would be (A) in compliance with the covenants described
under "-- Limitation on Indebtedness" or "-- Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries" immediately after giving effect to
such Sale/Leaseback Transaction and (B) entitled to create a Lien on such
property securing the Attributable Debt with respect to such Sale/Leaseback
Transaction without securing the Notes pursuant to the covenant described under
"-- Limitation on Liens", (ii) the net proceeds received by the Company or any
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Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair market value (as determined by the Board of Directors of
the Company) of such property and (iii) the Company or such Restricted
Subsidiary applies the proceeds of such transaction in compliance with the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock".
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes, and
after giving effect to, the proposed Restricted Payment: (i) a Default shall
have occurred and be continuing (or would result therefrom); (ii) the Company is
not able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a)
of the covenant described under "-- Limitation on Indebtedness"; or (iii) the
aggregate amount of such Restricted Payment and all other Restricted Payments
since the Issue Date would exceed the sum of: (A) 75% of the Consolidated Net
Income accrued during the period (treated as one accounting period) from the
beginning of the fiscal quarter during which the Notes are originally issued to
the end of the most recent fiscal quarter ending prior to the date of such
Restricted Payment for which consolidated income statements of the Company are
available (or, in case such Consolidated Net Income shall be a deficit, minus
100% of such deficit); (B) the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of the Company); (C) the amount by which Indebtedness of the Company
or its Restricted Subsidiaries is reduced on the Company's balance sheet upon
the conversion or exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date, of any Indebtedness of the Company for Capital
Stock (other than Disqualified Stock) of the Company (less the amount of any
cash, or the fair market value of any other property, distributed by the Company
upon such conversion or exchange), whether pursuant to the terms of such
Indebtedness or pursuant to an agreement with a creditor to engage in an equity
for debt exchange; and (D) an amount equal to the sum of (i) the net reduction
in Investments in Unrestricted Subsidiaries resulting from dividends, repayments
of loans or advances or other transfers of assets, in each case to the Company
or any Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of an Unrestricted Subsidiary at the
time such Unrestricted Subsidiary is designated a Restricted Subsidiary;
provided, however, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and treated
as a Restricted Payment) by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary subsequent to the date of the Indenture.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than (A) Disqualified
Stock or (B) Capital Stock issued or sold to a Subsidiary of the Company) or out
of the proceeds of a substantially concurrent capital contribution to the
Company; provided, however, that (x) such purchase, capital contribution or
redemption shall be excluded in the calculation of the amount of Restricted
Payments and (y) the Net Cash Proceeds from such sale of Capital Stock or
capital contribution shall be excluded from clause (iii)(B) of paragraph (a)
above; (ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to the
covenant described under "-- Limitation on Indebtedness"; provided, however,
that such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments; (iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with paragraph (a) above; provided, however, that such dividend shall
be included in the calculation of the amount of Restricted Payments; (iv) the
repurchase of Capital Stock of the Company from directors, officers or employees
of the Company pursuant to the terms of an employee benefit plan or employment
or other agreement; provided that the aggregate amount of all such repurchases
shall not exceed $3.5 million in any fiscal year, and $10.0 million in total;
and (v) Investments in Unrestricted Subsidiaries or joint ventures in an amount
not to exceed $5.0 million at any time outstanding.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any
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consensual encumbrance or restriction on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness or
obligations owed to the Company, (b) to make any loans or advances to the
Company or (c) to transfer any of its property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the Issue Date; (ii) any encumbrance or restriction with respect
to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction pursuant to an agreement effecting a Refinancing
of Indebtedness Incurred pursuant to an agreement referred to in clause (i) or
(ii) of this covenant or this clause (iii) or contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii); provided, however, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any such refinancing agreement or
amendment are not materially less favorable to the Noteholders than encumbrances
and restrictions with respect to such Restricted Subsidiary contained in such
agreements; (iv) any such encumbrance or restriction (A) consisting of customary
non-assignment provisions in leases to the extent such provisions restrict the
subletting, assignment or transfer of the lease or the property leased
thereunder or in purchase money financing or (B) by virtue of any transfer,
option or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by the Indenture;
(v) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the
extent such restrictions restrict the transfer of the property subject to such
security agreements or mortgages; (vi) encumbrances or restrictions imposed by
operation of applicable law; and (vii) any restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into for the sale
or disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition, and at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (ii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) first, to the extent the
Company elects (or is required by the terms of any Indebtedness), to prepay,
repay, redeem or purchase (and permanently reduce the commitments under)
Indebtedness of the Company or any Restricted Subsidiary (other than a
Subordinated Obligation and other than any Disqualified Stock) under the New
Credit Facility or that is otherwise secured by the assets subject to the Asset
Disposition within one year from the later of the date of such Asset Disposition
or the receipt of such Net Available Cash (the "Receipt Date"); (B) second, to
the extent of the balance of such Net Available Cash after application in
accordance with clause (A), to the extent the Company elects, to acquire
Additional Assets; provided, however, that the Company shall be required to
commit such Net Available Cash to the acquisition of Additional Assets within
one year from the later of the date of such Asset Disposition or the Receipt
Date and shall be required to consummate the acquisition of such Additional
Assets within 18 months from the Receipt Date; (C) third, to the extent of the
balance of such Net Available Cash after application in accordance with clauses
(A) and (B), to make an offer pursuant to paragraph (b) below to the Holders to
purchase Notes pursuant to and subject to the conditions contained in the
Indenture; and (D) fourth, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A), (B) and (C) to any other
application or use not prohibited by the Indenture. Notwithstanding the
foregoing provisions of this paragraph, the Company and the Restricted
Subsidiaries shall not be required to apply the Net Available Cash in accordance
with this paragraph except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
paragraph exceeds $5.0 million (at which time, the entire unutilized Net
Available Cash, and not just the amount in excess of $5.0 million, shall be
applied pursuant to this paragraph). Pending
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application of Net Available Cash pursuant to this covenant, such Net Available
Cash shall be invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the express assumption of Indebtedness of the Company or
any Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition, and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are converted by the Company or such
Restricted Subsidiary into cash within 90 days of closing the transaction.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes pursuant to clause (a)(ii)(C) above, the Company will be required to
purchase Notes tendered pursuant to an offer by the Company for the Notes at a
purchase price of 100% of their principal amount (without premium) plus accrued
but unpaid interest in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture. If the aggregate
purchase price of Notes tendered pursuant to such offer is less than the Net
Available Cash allotted to the purchase thereof, the Company will be required to
apply the remaining Net Available Cash in accordance with clause (a)(ii)(D)
above. The Company shall not be required to make such an offer to purchase Notes
pursuant to this covenant if the Net Available Cash available therefor after
application of the proceeds as provided in clause (a)(ii)(A) and (a)(ii)(B) is
less than $5.0 million (which lesser amount shall be carried forward for
purposes of determining whether such an offer is required with respect to any
subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into any transaction (including
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
the terms thereof (1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
a comparable transaction in arm's-length dealings with a Person who is not such
an Affiliate, (2) if such Affiliate Transaction involves an amount in excess of
$1.0 million, (i) are set forth in writing and (ii) have been approved by a
majority of the members of the Board of Directors having no material personal
financial stake in such Affiliate Transaction and (3) if such Affiliate
Transaction involves an amount in excess of $5.0 million, have been determined
by a nationally recognized investment banking firm to be fair, from a financial
standpoint, to the Company or its Restricted Subsidiary, as the case may be.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Permitted Investment or Restricted Payment permitted to be made pursuant to
the covenant described under "-- Limitation on Restricted Payments," or any
payment or transaction specifically excepted from the definition of Restricted
Payment, (ii) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise and the performance of any other obligations of
the Company or any Restricted Subsidiary pursuant to, or the funding of,
employment arrangements, collective bargaining agreements, employee benefit
plans, health and life insurance plans, deferred compensation plans, directors'
and officers' indemnification agreements, retirement or savings plans, stock
options and stock ownership plans or any other similar arrangement heretofore or
hereafter entered into in the ordinary course of business or consistent with
past practice, (iii) the grant of stock options or similar rights to employees
and directors pursuant to plans approved by the Board of Directors or the board
of directors of the relevant Restricted Subsidiary, (iv) loans or advances to
officers, directors or employees heretofore or hereafter entered into in the
ordinary course of business or consistent with past practice, (v) the payment of
reasonable fees to directors of the Company and its Restricted Subsidiaries who
are not employees of the Company or its Restricted Subsidiaries, (vi) any
Affiliate Transaction between the Company and a Wholly Owned Subsidiary or
between Wholly Owned Subsidiaries, or (vii) the purchase of or the payment of
Indebtedness of or monies owed by the Company or any of its Restricted
Subsidiaries for goods or materials purchased, or services received, in the
ordinary course of business.
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Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
shares of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary or (ii) if, immediately after giving effect to such issuance, sale or
other disposition, such Restricted Subsidiary remains a Restricted Subsidiary;
provided, however, that in connection with any such sale or disposition of
Capital Stock the Company or any such Restricted Subsidiary complies with the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock."
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, its assets substantially as an entirety to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company")
shall be a Person organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) shall expressly assume, by an indenture supplemental
thereto, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction, the Successor Company shall have Consolidated Net
Worth in an amount that is not less than the Consolidated Net Worth of the
Company prior to such transaction minus any costs incurred in connection with
such transaction; and (iv) the Company shall have delivered to the Trustee an
officer's certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor company, only in the case
of a conveyance, transfer or lease, shall not be released from the obligation to
pay the principal of and interest on the Notes.
Notwithstanding the foregoing, (i) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (ii) the Company may merge with an Affiliate
incorporated for the purpose of reincorporating the Company in another
jurisdiction to realize tax or other benefits.
SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC (if then permissible) and provide,
within 15 days after such reports would be required to be filed, to the Trustee
and Noteholders such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon acceleration or otherwise,
(iii) the failure by the Company to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above, (iv) the failure by
the Company to comply for 30 days after the Company receives written notice with
any of its obligations in the covenants described above under "Change of
Control" (other than a failure to purchase Notes) or under "-- Certain
Covenants -- Limitation on Indebtedness," "-- Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries," "-- Limitation on Sale/Leaseback
Transactions," "-- Limitation on Restricted Payments," "-- Limitation on Sales
of Assets and Subsidiary Stock," or "-- Limitation on the Sale or Issuance of
Capital Stock of Restricted Subsidiaries," (v) the failure by the Company to
comply for 60 days after the Company receives written notice with its other
agreements contained in the Indenture, (vi) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or acceleration by the holders thereof because of a
default and the total amount of such Indebtedness
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unpaid or accelerated exceeds $10.0 million (the "cross acceleration
provision"), (vii) certain events of bankruptcy, insolvency or reorganization of
the Company or any Significant Subsidiary (the "bankruptcy provisions") or
(viii) the rendering of any judgment or decree for the payment of money in
excess of $10.0 million against the Company or any Significant Subsidiary if
such judgment remains outstanding for a period of 60 days and is not discharged,
waived or stayed within 30 days after notice (the "judgment default provision").
However, a default under clause (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default (other than the bankruptcy provisions relating to
the Company) occurs and is continuing, the Trustee or the Holders of at least
25% in principal amount of the outstanding Notes may declare the principal of
and accrued but unpaid interest on all the Notes to be due and payable. Upon
such a declaration, such principal and interest shall be due and payable
immediately. If an Event of Default relating to the bankruptcy provisions
relating to the Company occurs and is continuing, the principal of and interest
on all the Notes will ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holders.
The Holders of a majority in aggregate principal amount of the outstanding Notes
by notice to the Trustee may rescind an acceleration and its consequences if the
rescission would not conflict with any judgment or decree and if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of acceleration. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder of a Note may pursue
any remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee written notice that an Event of Default is
continuing, (ii) Holders of at least 25% in principal amount of the outstanding
Notes have requested in writing the Trustee to pursue the remedy, (iii) such
Holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such request
within 60 days after the receipt thereof and the offer of security or indemnity
and (v) the Holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request within
such 60-day period. Subject to certain restrictions, the Holders of a majority
in principal amount of the outstanding Notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that the Trustee determines is unduly prejudicial to the rights
of any other Holder or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of or interest on any Note, the Trustee may withhold notice if and
so long as the board of directors, the executive committee or a committee of its
trust officers determines that withholding notice is not opposed to the interest
of the Holders. In addition, the Company is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Company also is required to deliver to the Trustee, within 30
days after the occurrence thereof, written notice of any event which would
constitute certain Defaults, their status and what action the Company is taking
or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the Holders of a majority in principal
amount of the Notes then outstanding.
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Without the consent of each Holder of an outstanding Note affected thereby,
no amendment may (i) reduce the amount of Notes whose Holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption" above, (v) make any Note payable in money other than that stated in
the Note, (vi) impair the right of any Holder to receive payment of principal of
and interest on such Holder's Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to such
Holder's Notes, (vii) make any change in the amendment provisions which require
each Holder's consent or in the waiver provisions or (viii) affect the ranking
of the Notes in any material respect.
Without the consent of any Holder, the Company and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add guarantees with respect to the Notes, to secure the Notes,
to add to the covenants of the Company for the benefit of the Holders or to
surrender any right or power conferred upon the Company, to make any change that
does not adversely affect the rights of any Holder or to comply with any
requirement of the SEC in connection with the qualification of the Indenture
under the TIA.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders a notice briefly describing such amendment. However,
the failure to give such notice to all Holders, or any defect therein, will not
impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Company may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges. The Company is not required to transfer or exchange any Note selected
for redemption or repurchase or to transfer or exchange any Note for a period of
15 days prior to a selection of Notes to be redeemed or repurchased.
DEFEASANCE
The Company at its option at any time may terminate all of its obligations
under the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes. In addition, the Company at its option at any time may terminate its
obligations under "Change of Control" and under the covenants described under
"-- Certain Covenants" (other than the covenant described under "-- Merger and
Consolidation" except as described below) (and any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes), the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Significant Subsidiaries and the judgment default
provision described under "-- Defaults" above and the limitations contained in
clauses (iii) and (iv) of the first paragraph under "-- Certain Covenants --
Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default under the provisions described in the last sentence of the
foregoing paragraph.
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In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an Opinion of Counsel to
the effect that Holders will not recognize income, gain or loss for Federal
income tax purposes as a result of such deposit and defeasance and will be
subject to Federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when: (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee an amount in
United States dollars sufficient to pay and discharge the entire indebtedness on
the Notes not theretofore delivered to the Trustee for cancellation, for the
principal of, premium, if any, and interest to the date of deposit; (ii) the
Company has paid or caused to be paid all other sums payable under the Indenture
by the Company; and (iii) the Company has delivered to the Trustee an Officers'
Certificate and an opinion of counsel each stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the SEC that such waiver is against public policy.
CONCERNING THE TRUSTEE
First Trust National Association is to be the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes. Such bank may also act as a depository of funds for, or make loans
to and perform other services for, the Company or its affiliates in the ordinary
course of business in the future. The corporate trust office of the Trustee is
located at First Trust New York, 100 Wall Street, 20th Floor, New York, NY
10005.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture. The Trustee may resign at any
time or may be removed by the Company. If the Trustee resigns, is removed or
becomes incapable of acting as Trustee or if a vacancy occurs in the office of
the Trustee for any cause, a successor Trustee shall be appointed in accordance
with the provisions of the Indenture.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the TIA, the Trustee shall either eliminate such interest or resign,
to the extent and in the manner provided by, and subject to the provisions
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of, the TIA and the Indenture. The Indenture also contains certain limitations
on the right of the Trustee, as a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received by it in
respect of any such claims, as security or otherwise.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business, (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clause (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any person who is a director or
officer (a) of such Person, (b) of any Subsidiary of such Person or (c) of any
Person described in clause (i) above. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger or
consolidation (each referred to for the purposes of this definition as a
"disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary
(other than directors' qualifying shares or shares required by applicable law to
be held by a Person other than the Company or a Restricted Subsidiary), (ii) all
or substantially all the assets of any division or line of business of the
Company or any Restricted Subsidiary or (iii) any other assets of the Company or
any Restricted Subsidiary outside of the ordinary course of business of the
Company or such Restricted Subsidiary (other than, in the case of (i), (ii) and
(iii) above, (x) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary and (y) for
purposes of the covenant described under "-- Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock" only, a disposition that constitutes a
Restricted Payment permitted by the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments" or a disposition specifically
excepted from the definition of Restricted Payment) provided, however, that
Asset Disposition shall not include (a) a transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration less than or equal to $1.0 million or (b) the sale,
lease, conveyance, disposition or other transfer of all or substantially all of
the assets of the Company as permitted under "Certain Covenants -- Merger,
Consolidation and Sale of Assets."
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total minimum obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/ Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
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"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Company or any Restricted
Subsidiary has (x) Incurred any Indebtedness (other than Indebtedness Incurred
for working capital purposes under the New Credit Facility) since the beginning
of such period that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
is an Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro forma
basis to such Indebtedness as if such Indebtedness had been Incurred on the
first day of such period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period
or (y) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer outstanding on
such date of determination, or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio involves a discharge of Indebtedness,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect to such discharge of such Indebtedness, including with the
proceeds of such new Indebtedness, as if such discharge had occurred on the
first day of such period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such Indebtedness during such four quarter period),
(2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for such period
shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if negative)
directly attributable thereto for such period and Consolidated Interest Expense
for such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in connection
with such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense for such period
directly attributable to the Indebtedness of such Restricted Subsidiary to the
extent the Company and its continuing Restricted Subsidiaries are no longer
liable for such Indebtedness after such sale), (3) if since the beginning of
such period the Company or any Restricted Subsidiary (by merger or otherwise)
shall have made an Investment in any Restricted Subsidiary (or any Person which
becomes a Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring a
calculation to be made hereunder, which constitutes all or substantially all of
an operating unit of a business, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto (including
the Incurrence of any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period, and (4) if since the beginning of such
period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary since the beginning
of such period) shall have made any Asset Disposition, Investment or acquisition
of assets that would have required an adjustment pursuant to clause (2) or (3)
above if made by the
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Company or a Restricted Subsidiary during such period, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or acquisition occurred
on the first day of such period. For purposes of this definition, whenever pro
forma effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest on such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, (i) interest expense
attributable to Capital Lease Obligations, (ii) amortization of debt discount
and debt issuance costs, (iii) capitalized interest, (iv) non-cash interest
expense, (v) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing, (vi) net costs
associated with Hedging Obligations (including amortization of fees), (vii) cash
dividends paid in respect of any Disqualified Stock of the Company or any
Preferred Stock of any Restricted Subsidiary of the Company held by Persons
other than the Company or a Wholly Owned Subsidiary (excluding the dividend paid
in connection with the Recapitalization), (viii) interest incurred in connection
with Investments in discontinued operations and (ix) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by the Company or any Restricted Subsidiary.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that subject to the
exclusion contained in clause (iv) below, the Company's equity in the net income
of any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other distribution
paid to a Restricted Subsidiary, to the limitations contained in clause (iii)
below); (ii) any net income (or loss) of any Person acquired by the Company or a
Subsidiary of the Company in a pooling of interests transaction for any period
prior to the date of such acquisition; (iii) any net income of any Restricted
Subsidiary to the extent that such Restricted Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, except that subject to the exclusion contained in clause (iv) below,
the Company's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Restricted Subsidiary
during such period to the Company or another Restricted Subsidiary as a dividend
or other distribution (subject, in the case of a dividend or other distribution
paid to another Restricted Subsidiary, to the limitation contained in this
clause); (iv) any gain or loss realized upon the sale or other disposition of
any assets of the Company or its consolidated Subsidiaries (including pursuant
to any sale-and-leaseback arrangement) which is not sold or otherwise disposed
of in the ordinary course of business and any gain or loss realized upon the
sale or other disposition of any Capital Stock of any Person; (v) extraordinary
gains or losses; and (vi) the cumulative effect of a change in accounting
principles.
"Consolidated Net Worth" means, as of any date, the total of the amounts
shown on the balance sheet of the Company and its Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of such date, as
(i) the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit
and (B) any amounts attributable to Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
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"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (other than
as a result of a Change of Control) (i) matures or is mandatorily redeemable
pursuant to a sinking fund obligation or otherwise, (ii) is convertible into or
exchangeable for Indebtedness or Disqualified Stock or (iii) is redeemable at
the option of the holder thereof, in whole or in part, in each case on or prior
to the Stated Maturity of the Notes; provided, however, that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are not more favorable to
the holders of such Capital Stock than the provisions described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
"-- Certain Covenants -- Change of Control."
"EBITDA" for any period means the sum of Consolidated Net Income plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company, (b) depreciation expense, (c) amortization expense and (d) all other
non-cash items reducing such Consolidated Net Income less all non-cash items
increasing such Consolidated Net Income (such amount calculated pursuant to this
clause (d) not to be less than zero), in each case for such period; and minus
the amount of all cash payments made by the Company or any Restricted Subsidiary
during such period to the extent that such payments relate to non-cash items
that were added back in determining EBITDA for any period subsequent to the
Issue Date. Notwithstanding the foregoing, the provision for taxes based on the
income or profits of, and the depreciation and amortization of, a Subsidiary of
the Company shall be added to Consolidated Net Income to compute EBITDA only to
the extent (and in the same proportion) that the net income of such Subsidiary
was included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth (i) in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) in statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) in the rules and regulations of the SEC
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such Person (whether arising by virtue of agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the obligee of such Indebtedness
of the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); provided, however, that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding meaning.
The term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
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"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for Indebtedness; provided, however, that any Indebtedness of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall be deemed the Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property
(which purchase price is due more than one year after taking title of such
property), all conditional sale obligations of such Person and all obligations
of such Person under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business); (iv) all obligations of
such Person for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction (other than obligations with
respect to letters of credit securing obligations (other than obligations
described in clauses (i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon, or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit); (v) the amount of
all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock or, with respect to any Subsidiary of
such Person, any Preferred Stock (but excluding, in each case, any accrued
dividends); (vi) all obligations of the type referred to in clauses (i) through
(v) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee; (vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such property or
assets or the amount of the obligation so secured; and (viii) to the extent not
otherwise included in this definition, Hedging Obligations of such Person. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date. For purposes of
clarification, Indebtedness shall not include undrawn commitments on the New
Credit Facility.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed solely
to protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the Person making the
advance or loan) or other extensions of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the definition of "Unrestricted Subsidiary," the definition of "Restricted
Payment" and the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments," (i) "Investment" shall include the portion (proportionate
to the Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such Subsidiary
is designated an Unrestricted Subsidiary; provided, however, that if such
designation is made in connection with the acquisition of such Subsidiary or the
assets owned by such Subsidiary, the "Investment" in such Subsidiary shall be
deemed to be the consideration paid in connection with such acquisition;
provided further, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
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<PAGE> 69
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation, and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means the date of original issuance of the Notes.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or required by law to
close. If a payment date is a Legal Holiday, payment shall be made on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the record date
shall not be affected.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form) in each case
net of (i) all legal, title and recording tax expenses, brokerage commissions,
underwriting discounts or commissions or sales commissions and other reasonable
fees and expenses (including, without limitation, fees and expenses of counsel,
accountants and investment bankers) related to such Asset Disposition or
converting to cash any other proceeds received, and any relocation and severance
expenses as a result thereof, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition or made in order to
obtain a necessary consent to such Asset Disposition or to comply with
applicable law, (iii) all distributions and other payments required to be made
to minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition and (iv) appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
property or other assets disposed of in such Asset Disposition and retained by
the Company or any Restricted Subsidiary after such Asset Disposition,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Disposition. Further,
with respect to an Asset Disposition by a Subsidiary which is not a Wholly Owned
Subsidiary, Net Available Cash shall be reduced pro rata for the portion of the
equity of such Subsidiary which is not owned by the Company.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof. In addition, for the purposes of the calculations described in
"Certain Covenants -- Limitation on Restricted Payments," Net Cash Proceeds
shall also mean any cash amounts paid to the Company by members of management of
the Company in respect of certain Promissory Notes described under "Certain
Transactions."
"New Credit Facility" means the Credit Agreement, dated as of May 28, 1997,
among the Company, Heller Financial, Inc., as agent, and the lenders party
thereto, as such agreement, in whole or in part, may be amended, renewed,
extended, increased (but only so long as such increase is permitted under the
terms of the Indenture), substituted, refinanced, restructured, replaced
(including, without limitation, any successive renewals, extensions, increases,
substitutions, refinancings, restructurings, replacements, supplements or other
modifications of the foregoing). Subsequent to the date of the Indenture, there
may be multiple New Credit Facilities and the term "New Credit Facility" shall
mean all such New Credit Facilities.
"Permitted Holders" means (i) The Principal Fund, Trust Company of the West
or any of their respective Affiliates and (ii) Oaktree and its Affiliates,
including any partnerships, separate accounts, or other entities managed by
Oaktree.
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"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making
of such Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is a Related Business; (ii)
another Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Restricted Subsidiary; provided, however, that such
Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) receivables owing to the Company or any Restricted Subsidiary
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Company or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees permitted under "Certain Covenants -- Limitation on
Affiliate Transactions;" (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (viii)
payments, including without limitation, security deposits, made to utilities or
landlords in the ordinary course of business; and (ix) any Person to the extent
such Investment represents the non-cash portion of the consideration received
for an Asset Disposition as permitted pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock."
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under workers' compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits or cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings; (c)
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review or time for appeal has not yet expired; (d) Liens for taxes,
assessments or other governmental charges not yet subject to penalties for
non-payment or which are being contested in good faith by appropriate
proceedings; (e) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (f) survey exceptions, encumbrances, easements
or reservations of or rights of others for licenses, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real properties or Liens
incidental to the conduct of the business of such Person or to the ownership of
its properties which were not incurred in connection with Indebtedness and which
do not in the aggregate materially adversely affect the value of said properties
or materially impair their use in the operation of the business of such Person;
(g) Liens securing an Interest Rate Agreement so long as the related
Indebtedness is, and is permitted to be under the Indenture, secured by a Lien
on the same property securing the Interest Rate Agreement; and (h) leases and
subleases of real property which do not interfere with the ordinary conduct of
the business of such Person, and which are made on customary and usual terms
applicable to similar properties.
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
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"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding (plus fees and expenses, including any premium and defeasance costs)
under the Indebtedness being Refinanced (provided, however, that Refinancing
Indebtedness with respect to the Company's outstanding industrial revenue bonds
may have an aggregate principal amount in excess of the aggregate principal
amount outstanding on the Issue Date, such excess not to exceed the lesser of
the value of the real property that is subject to such Indebtedness being
Refinanced and $3 million); provided, further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that
Refinances Indebtedness of the Company or (y) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company on the Issue Date.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person), other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Restricted Subsidiary that is not a Wholly Owned Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a Restricted
Subsidiary that is an entity other than a corporation), (ii) the purchase,
redemption or other acquisition or retirement for value of any Capital Stock of
the Company held by any Person or of any Capital Stock of a Restricted
Subsidiary held by any Affiliate of the Company (other than a Restricted
Subsidiary), including the exercise of any option to exchange any Capital Stock
(other than into Capital Stock of the Company that is not Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations purchased
in anticipation of satisfying of a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition) or (iv) the making of any Investment in any Person (other than a
Permitted Investment). For purposes of clarification, Restricted Payment does
not include any dividend, distribution or payment made in connection with the
Recapitalization.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
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"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
limited liability company, limited or general partnership or other business
entity of which more than 50% of the total voting power of shares of Capital
Stock or other interests (including partnership interests) entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
"S&P" means Standard & Poor's Ratings Service.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $10.0 million (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally recognized
statistical rating organization (as defined in Rule 436 under the Securities
Act) or any money-market fund sponsored by a registered broker dealer or mutual
fund distributor, (iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i) above
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) investments in commercial paper, maturing not more than six months
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's or "A-1" (or higher) according to S&P, and (v)
investments in securities with maturities of six months or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or "A" by Moody's.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) if such Unrestricted Subsidiary at
such time has Indebtedness, the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" and (y) no Default shall have occurred
and be continuing. Any such designation by the Board of Directors shall be
evidenced by the Company to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
provisions.
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"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated May 22, 1997 (the "Underwriting Agreement") between the Company and Credit
Suisse First Boston Corporation and Salomon Brothers Inc (the "Underwriters"),
the Company has agreed to sell to the Underwriters, and the Underwriters have
agreed to purchase, severally but not jointly, from the Company, the principal
amount of Notes set forth opposite their names below:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
------------ ------------
<S> <C>
Credit Suisse First Boston Corporation...................... $ 98,787,000
Salomon Brothers Inc........................................ 31,213,000
------------
$130,000,000
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all the Notes, if any are purchased.
The Underwriting Agreement provides that, in the event of a default by an
Underwriter, in certain circumstances the purchase commitments of non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to investors initially at the offering price to
investors set forth on the cover page of this Prospectus, and to certain dealers
at such price less a concession of 1.40% of the principal amount per Note. After
the initial public offering, the public offering price and concession may be
changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in respect
thereof.
The Notes are a new issue of securities with no established trading market.
The Underwriters have advised the Company that the Underwriters presently intend
to act as market makers in the Notes. The Underwriters are not obligated,
however, to make a market in the Notes and may discontinue any market making at
any time without notice. Accordingly, no assurance can be given as to the
development or liquidity of any trading market for the Notes.
Until the distribution of the Notes is completed, the rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Notes. As an exception
to these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Notes. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Notes.
If the Underwriters create a short position in the Notes in connection with
the Offering, i.e., if they sell more Notes than are set forth on the cover page
of this Prospectus, the Underwriters may reduce that short position by
purchasing Notes in the open market.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Notes in the open market
to reduce the Underwriters' short position or to stabilize the price of the
Notes, they may reclaim the amount of the selling concession from the selling
group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the Notes. In addition,
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<PAGE> 75
neither the Company nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Credit Suisse First Boston Corporation has performed certain financial
advisory services for the Company in the past and may continue to do so in the
future.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Notes in Canada is being made only on a private
placement basis, exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Notes are effected. Accordingly, any resale of the Notes in Canada
must be made in accordance with applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be made
in accordance with available statutory exemptions or pursuant to a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resales of the Notes.
REPRESENTATION OF PURCHASERS
Each purchaser of Notes in Canada who receives a purchase confirmation will
be deemed to represent to the Company and the dealer from whom such purchase
confirmation is received that (i) such purchaser is entitled under applicable
provincial securities laws to purchase such Notes without the benefit of a
prospectus qualified under such securities laws, (ii) where required by law,
that such purchaser is purchasing as principal and not as agent and (iii) such
purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or remission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against such Company
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Notes to whom the Securities Act (British Columbia) applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any Notes acquired
by such purchaser pursuant to this Offering. Such report must be in the form
attached to British Columbia Securities Commission Blanket Order BOR #95/17, a
copy of which may be obtained from the Company. Only one such report must be
filed in respect of Notes acquired on the same date and under the same
prospectus exemption.
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TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Notes should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the Notes in
their particular circumstances and with respect to the eligibility of the Notes
for investment by the purchaser under relevant Canadian legislation.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Gibson, Dunn & Crutcher LLP, New York, New York. Cahill Gordon &
Reindel (a partnership including a professional corporation), New York, New York
has acted as counsel for the Underwriters.
INDEPENDENT ACCOUNTANTS
The Financial Statements as of December 31, 1995 and December 29, 1996 and
for the six months ended June 26, 1994, the six months ended December 25, 1994
and for each of the two years in the period ended December 29, 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.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Notes offered hereby
(herein, together with all amendments and exhibits thereto, referred to as the
"Registration Statement") on Form S-1 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, indenture or other document referred to are not
necessarily complete. With respect to each such contract, agreement, indenture
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
and copied (at prescribed rates) at the public reference facilities maintained
by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the Commissions regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Seven World Trade Center, New York, New York 10048. The Commission also
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Web site is located at http://www.sec.gov.
As a result of the Offering, the Company will become subject to the
information and reporting requirements of the Exchange Act, and in accordance
therewith will file periodic reports and other information with the Commission.
All such information may be inspected and copied at the public reference
facilities maintained by the Commission at the locations referred to above. The
Indenture pursuant to which the Notes will be issued will require the Company to
file with the Commission and to distribute to holders of the Notes annual
reports containing audited financial statements following the end of the fiscal
year as well as quarterly reports containing unaudited financial statements for
the first three quarters of each fiscal year following the end of each such
quarter.
74
<PAGE> 77
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Balance Sheets of December 31, 1995, December 29, 1996,
and March 30, 1997 (unaudited)......................... F-3
Statements of Operations for the six months ended June 26,
1994 (Predecessor) and December 25, 1994, for the two
years ended December 29, 1996 and for the three months
ended March 31, 1996 (unaudited) and March 30, 1997
(unaudited)............................................ F-4
Statements of Stockholders' Equity for the six months
ended June 26, 1994 (Predecessor), December 25, 1994,
for the two years ended December 29, 1996 and for the
three months ended March 30, 1997 (unaudited).......... F-5
Statements of Cash Flows for the six months ended June 26,
1994 (Predecessor) and December 25, 1994, for the two
years ended December 29, 1996 and for the three months
ended March 31, 1996 (unaudited) and March 30, 1997
(unaudited)............................................ F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Chief Auto Parts Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Chief Auto Parts Inc. at December
29, 1996 and December 31, 1995 and the results of its operations and its cash
flow for each of the two years in the period ended December 29, 1996, and for
the six months ended December 25, 1994, and the results of operations and cash
flows of the Company's predecessor, also known as Chief Auto Parts Inc., for the
six months ended June 26, 1994, 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.
/s/ PRICE WATERHOUSE LLP
Dallas, Texas
March 24, 1997
F-2
<PAGE> 79
CHIEF AUTO PARTS INC.
BALANCE SHEETS -- DECEMBER 31, 1995, DECEMBER 29, 1996 AND
MARCH 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
MARCH 30, 1997
DECEMBER 31, DECEMBER 29, MARCH 30, LONG-TERM DEBT
1995 1996 1997 AND EQUITY
------------ ------------ ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents............................... $ 1,202 $ 1,140 $ 1,138
Accounts receivable, trade......................... 1,337 1,529 1,649
Accounts receivable, other, less allowances of
$480, $300 and $339.............................. 3,741 3,955 4,280
Merchandise inventories............................ 107,633 140,418 141,142
Deferred income taxes.............................. 2,959 6,084 6,084
Prepaid and other.................................. 709 1,014 1,239
-------- -------- --------
Total current assets...................... 117,581 154,140 155,532
PROPERTY AND EQUIPMENT, at cost:
Land............................................... 12,451 11,935 11,802
Buildings.......................................... 14,066 14,037 13,826
Leasehold improvements............................. 10,177 15,194 16,567
Furniture and equipment............................ 28,855 43,905 46,431
Assets under capital leases........................ 23,902 21,356 21,356
Equipment and construction in process.............. 1,155 3,301 2,208
-------- -------- --------
Total property and equipment.............. 90,606 109,728 112,190
Less accumulated depreciation and amortization..... 13,385 22,018 24,304
-------- -------- --------
Net property and equipment......................... 77,221 87,710 87,886
GOODWILL, less accumulated amortization of $2,144,
$3,574 and $3,854................................ 53,436 42,006 41,726
DEFERRED INCOME TAXES.............................. 4,791 13,018 13,018
OTHER ASSETS....................................... 1,390 1,474 1,310
-------- -------- --------
TOTAL..................................... $254,419 $298,348 $299,472
======== ======== ========
LIABILITIES
CURRENT LIABILITIES:
Current portion of long-term debt.................. $ 573 $ 622 $ 634
Current portion of obligations under capital
leases........................................... 1,223 1,318 1,359
Trade accounts payable............................. 55,696 71,928 74,742
Accrued salaries, benefits and related taxes....... 11,929 11,180 10,887
Accrued taxes (excluding payroll).................. 5,284 5,146 4,913
Other accrued liabilities.......................... 18,915 15,959 15,154
-------- -------- --------
Total current liabilities................. 93,620 106,153 107,689
LONG-TERM DEBT, less current portion............... 40,521 62,400 62,336 $138,422
OBLIGATIONS UNDER CAPITAL LEASES, less current
portion.......................................... 21,154 17,646 17,293
OTHER NONCURRENT LIABILITIES....................... 28,849 40,669 40,504
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par, 100,000 shares authorized,
shares issued and outstanding: 49,898............ $ 1 $ 1 $ 1 $ 1
Additional paid-in capital......................... 70,815 70,815 70,815 4,402
Less management notes receivable................... (1,922) (1,821) (1,821) (911)
Retained earnings.................................. 1,381 2,485 2,655 --
-------- -------- -------- --------
Total stockholders' equity................ 70,275 71,480 71,650 3,492
-------- -------- -------- --------
TOTAL..................................... $254,419 $298,348 $299,472
======== ======== ========
</TABLE>
See notes to financial statements
F-3
<PAGE> 80
CHIEF AUTO PARTS INC.
STATEMENTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 26, 1994 (PREDECESSOR) AND
DECEMBER 25, 1994, TWO YEARS ENDED DECEMBER 29, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) AND MARCH 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEARS ENDED THREE MONTHS ENDED
------------------------ DECEMBER MARCH
JUNE DECEMBER ------------------- -------------------
1994 1994 1995 1996 1996 1997
------------- -------- -------- -------- -------- --------
PREDECESSOR (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET SALES.................... $195,286 $203,878 $429,047 $438,182 $102,260 $109,854
COSTS AND EXPENSES:
Cost of goods sold,
warehousing and
distribution............... 114,452 133,390 251,628 251,764 58,579 63,281
Selling, general and
administrative............. 68,642 70,500 145,829 167,064 36,485 41,017
Depreciation and
amortization............... 3,626 5,020 10,397 11,622 2,666 3,251
-------- -------- -------- -------- -------- --------
Operating income (loss)...... 8,566 (5,032) 21,193 7,732 4,530 2,305
Interest expense, net........ 5,807 2,533 6,009 6,203 1,440 1,784
Other (expense) income,
net........................ 41 4 (205) (66) (65) (10)
-------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES...................... 2,800 (7,561) 14,979 1,463 3,025 511
INCOME TAX EXPENSE........... 1,383 537 5,500 359 1,353 341
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS)............ $ 1,417 $ (8,098) $ 9,479 $ 1,104 $ 1,672 $ 170
======== ======== ======== ======== ======== ========
</TABLE>
See notes to financial statements
F-4
<PAGE> 81
CHIEF AUTO PARTS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY -- SIX MONTHS ENDED
JUNE 26, 1994 (PREDECESSOR) AND DECEMBER 25, 1994, TWO
YEARS ENDED DECEMBER 29, 1996
AND THREE MONTHS ENDED MARCH 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
PREDECESSOR
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK RETAINED
---------------- NOTES PAID-IN PURCHASE EARNINGS
SHARES AMOUNT RECEIVABLE CAPITAL WARRANT (DEFICIT) TOTAL
------- ------ ---------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 26, 1993.............. 135,933 $1 $(338) $10,605 $2,150 $(61,238) $(48,820)
Net income.............................. 1,417 1,417
Reduction of notes receivable........... 100 100
------- -- ----- ------- ------ -------- --------
Balance, June 26, 1994.................. 135,933 $1 $(238) $10,605 $2,150 $(59,821) $(47,303)
======= == ===== ======= ====== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
COMPANY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
---------------- NOTES PAID-IN EARNINGS
SHARES AMOUNT RECEIVABLE CAPITAL (DEFICIT) TOTAL
------- ------ ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
To majority stockholders.............. 47,210 $1 $66,999 $67,000
To management and director............ 2,588 $(1,930) 3,674 1,744
Net loss for the six months ended
December 25, 1994..................... $(8,098) (8,098)
------- -- ------- ------- ------- -------
Balance, December 25, 1994.............. 49,798 1 (1,930) 70,673 (8,098) 60,646
Issuance of common stock to
management............................ 100 (95) 142 47
Payments on notes receivable............ 103 103
Net income.............................. 9,479 9,479
------- -- ------- ------- ------- -------
Balance, December 31, 1995.............. 49,898 1 (1,922) 70,815 1,381 70,275
Payments on notes receivable............ 101 101
Net income.............................. 1,104 1,104
------- -- ------- ------- ------- -------
Balance, December 29, 1996.............. 49,898 1 (1,821) 70,815 2,485 71,480
Net income (unaudited).................. 170 170
Balance, March 30, 1997
------- -- ------- ------- ------- -------
(unaudited)........................... 49,898 $1 $(1,821) $70,815 $ 2,655 $71,650
======= == ======= ======= ======= =======
</TABLE>
See notes to financial statements
F-5
<PAGE> 82
CHIEF AUTO PARTS INC.
STATEMENTS OF CASH FLOWS -- SIX MONTHS ENDED JUNE 26, 1994 (PREDECESSOR)
AND DECEMBER 25, 1994, TWO YEARS ENDED DECEMBER 29, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) AND MARCH 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEARS ENDED THREE MONTHS ENDED
------------------------ DECEMBER MARCH
JUNE DECEMBER ------------------- -------------------------
1994 1994 1995 1996 1996 1997
------------- -------- -------- -------- ----------- -----------
(PREDECESSOR) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 1,417 $(8,098) $ 9,479 $ 1,104 $ 1,672 $ 170
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation and amortization............... 3,626 5,020 10,397 11,622 2,666 3,251
Amortization of deferred financing costs.... 34 133 266 319 67 101
Deferred compensation....................... -- 779 1,558 1,558 390 390
Provision for store closures and legal
reserves.................................. -- -- -- 14,000 -- --
Loss on sale of assets...................... 34 17 258 95 72 14
Provision for deferred income taxes......... -- -- 1,500 (1,352) -- --
Increase (decrease) from changes in:
Accounts receivable....................... 1,201 (630) (860) (406) (1,022) (445)
Merchandise inventories................... (4,660) 7,644 (17,565) (32,785) (12,106) (724)
Prepaid and other......................... 52 (412) 745 (305) (97) (225)
Other assets.............................. (238) (116) (101) (30) (32) 117
Accounts payable.......................... 9,987 (773) 5,879 16,232 8,472 2,814
Accrued salaries, benefits and related
taxes................................... 1,586 (1,026) (1,661) (749) (84) (293)
Accrued taxes............................. (1,347) 2,018 (1,458) (138) 433 (233)
Other accrued liabilities................. 1,419 (397) 2,770 (2,956) 1,500 (805)
Other noncurrent liabilities.............. 130 5,695 (2,118) (4,345) (577) (523)
------- -------- -------- -------- -------- --------
Net cash provided by operating activities..... 13,241 9,854 9,089 1,864 1,354 3,609
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment................................... 2,222 1,666 149 870 127 343
Additions to property and equipment........... (5,885) (6,512) (11,822) (23,275) (4,398) (3,536)
Purchase of Predecessor, net of cash
acquired.................................... -- (20,326) -- -- -- --
------- -------- -------- -------- -------- --------
Net cash used by investing activities......... (3,663) (25,172) (11,673) (22,405) (4,271) (3,193)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit loan........ 51,609 40,250 67,700 98,500 26,600 20,400
Payments against revolving credit loan........ (57,415) (40,750) (63,700) (76,000) (23,100) (20,300)
Initial funding of revolving credit loan...... -- 35,000 -- -- -- --
Deferred financing costs...................... -- (1,332) -- (372) (138) (54)
Issuance of stock, net of notes receivable.... -- 68,744 47 -- -- --
Principal payments on long-term debt.......... (3,713) (248) (532) (572) (139) (152)
Principal payments of obligations under
capital leases.............................. (138) (399) (965) (1,178) (284) (312)
Payments on management notes receivable for
common stock................................ 100 -- 103 101 -- --
Payment of Predecessor debt................... -- (88,453) -- -- -- --
------- -------- -------- -------- -------- --------
Net cash provided (used) by financing
activities.................................. (9,557) 12,812 2,653 20,479 2,939 (418)
------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS................................. 21 (2,506) 69 (62) 22 (2)
CASH AND EQUIVALENTS, beginning of period..... 1,095 3,639 1,133 1,202 1,202 1,140
------- -------- -------- -------- -------- --------
CASH AND EQUIVALENTS, end of period........... $ 1,116 $ 1,133 $ 1,202 $ 1,140 $ 1,224 $ 1,138
======= ======== ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................. $ 5,904 $ 2,291 $ 6,199 $ 5,819 $ 1,228 $ 1,818
======= ======== ======== ======== ======== ========
Income taxes paid............................. $ 70 $ 1,338 $ 3,688 $ 1,700 $ 1 $ 853
======= ======== ======== ======== ======== ========
</TABLE>
See notes to financial statements
F-6
<PAGE> 83
CHIEF AUTO PARTS INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Chief Auto Parts Inc. (the "Company" or "Chief")
is engaged in the sale and distribution of automotive parts to the retail and
wholesale aftermarket through a chain of 544 stores (located predominately in
California and Texas) at December 29, 1996.
Basis of Presentation -- The Company was party to a merger (as defined at
Note 2, the "Merger") in June 1994. Chief prior to the Merger is herein referred
to as the "Predecessor" or the "Predecessor Company."
The Merger was accounted for using the purchase method, in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations" ("APB 16").
The assets and liabilities of the Predecessor were revalued and significant
adjustments to the assets acquired and liabilities assumed were made to reflect
their estimated fair values at the date of the Merger, and accordingly the
results of operations subsequent to the date of the Merger are on a different
basis than those of the Predecessor Company. In addition, certain prior year
amounts have been reclassified to conform to the current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results may differ from these estimates.
Fiscal Year -- The Company's fiscal year is the 52- or 53-week period
ending on the last Sunday in December. The first fiscal period following the
Merger ended on December 25, 1994 (six months). Fiscal 1995 ended on December
31, 1995 (53 weeks), and fiscal 1996 ended on December 29, 1996 (52 weeks).
Predecessor Company information included in the accompanying financial
statements pertains to the six months ended June 26, 1994.
Merchandise Inventories -- Inventories are valued at the lower of cost or
market. Cost is determined on the retail method for retail store inventories,
and the weighted average cost method for warehouse inventories.
Property and Equipment -- Property and equipment, exclusive of capital
leases, are stated at cost. Significant additions and improvements are
capitalized; expenditures for maintenance and repairs are expensed. Costs
incurred in the selection and development of new store sites are capitalized as
construction costs and amortized over the lesser of the estimated useful life or
the term of the lease. Gains and losses on the disposition of property and
equipment are recognized in the period incurred. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets, ranging
from three to twenty-five years. Assets under capital leases are stated at the
lower of the present value of the minimum lease payments to be made during the
term of the lease or the fair value of the leased asset. Amortization of such
property is provided using the straight-line method over the term of the lease.
Goodwill -- The Company has classified as goodwill the cost in excess of
fair value of the net assets acquired in the Merger. Goodwill is being amortized
on the straight-line method over 40 years. Amortization for the six months ended
December 25, 1994 was $715,000 and for the years ended December 31, 1995 and
December 29, 1996 was $1,430,000 each year.
The Company evaluates the realizability of goodwill at each balance sheet
date based upon expectations of undiscounted cash flows and operating income.
The Company believes that no impairment of goodwill exists at December 29, 1996.
Advertising Costs -- Advertising costs are expensed the first time the
advertising takes place. For the six months ended June 26, 1994 (Predecessor)
and December 25, 1994, advertising expense, net of reimbursements by vendors,
was $3,239,000 and $1,502,000, respectively, and for the years ended December
31, 1995 and December 29, 1996, was $2,771,000 and $3,842,000, respectively.
F-7
<PAGE> 84
CHIEF AUTO PARTS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes -- Income tax expense is based on the liability method.
Deferred income taxes are provided for differences between tax laws and
financial accounting standards regarding the recognition and measurement of
assets, liabilities, revenues and expenses using presently enacted tax rates.
Such differences result principally from different methods of purchase price
allocation for tax and financial accounting purposes, depreciation, lease
transactions, and provisions for store closings.
Store Closing Costs -- The costs associated with closing stores are accrued
when the decision is made to close a location, and include disposition of
property and equipment and associated other costs. In the event a store is
closed before its lease has expired, a provision is recorded for the estimated
remaining lease obligation, less estimated sublease income, if any.
New Accounting Pronouncements -- During 1996, the Company adopted 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").
This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. SFAS 121 had no impact on the Company's financial
position or results of operations.
Additionally, during 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). This statement requires expanded disclosures of stock-based compensation
arrangements with employees, and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument. As more
fully described at Note 7, the Company has opted to continue the application of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and accordingly, the adoption of SFAS 123 had no effect
on the Company's financial position or results of operations.
2. CHANGE IN CONTROL
On June 27, 1994, Chief was merged with a subsidiary of TCW Special Credits
Fund V -- The Principal Fund ("The Principal Fund"), and was the surviving
corporation (the "Merger").
The Principal Fund and its affiliates then acquired 100% of the issued and
outstanding common stock of the Company. The aggregate purchase consideration
given in the Merger was approximately $72 million, including fees and expenses.
Equityholders at the date of the Merger received both cash consideration
and stock purchase warrants. The stock purchase warrants are exercisable for an
aggregate of 10% of the outstanding shares of common stock of the Company on a
fully-diluted basis, after the issuance of stock and stock options to management
(as more fully described at Note 7). All stock, options and warrants outstanding
prior to the Merger were canceled. The Merger was a nontaxable transaction, and
accordingly, the tax basis of the Predecessor Company carried forward as that of
the Company's.
In conjunction with the Merger, Chief entered into a $50 million revolving
credit agreement (the "Credit Agreement") with a bank, as more fully described
at Note 3. All debt due the Predecessor's sole senior lender was repaid at the
date of the Merger.
F-8
<PAGE> 85
CHIEF AUTO PARTS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and December
29, 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Revolving credit loan, due June 1999........................ $38,500 $61,000
$7.7 million industrial development bonds, interest at the
higher of 8% or 75% of prime (8% at December 29, 1996),
due monthly through December 1999......................... 2,594 2,022
------- -------
Total....................................................... 41,094 63,022
Less current portion........................................ 573 622
------- -------
Long-term debt.............................................. $40,521 $62,400
======= =======
</TABLE>
The commitment term of the Credit Agreement expires in June 1999.
Borrowings under the revolving credit facility are secured by the Company's
merchandise inventories. The maximum availability for borrowings ($80 million at
December 29, 1996, as amended November 4, 1996) is reduced by letter of credit
usage, which cannot exceed $10 million. At December 29, 1996, the Company had
outstanding a $500,000 letter of credit. A commitment fee ranging from 0.25% to
0.5% is payable on the unused portion.
At the Company's option, interest on the revolving credit loan is payable
either quarterly or on the last day of defined interest periods, based on either
(a) the higher of prime or the federal funds effective rate plus 0.5% (plus, in
either case, a defined margin rate ranging up to 0.75%), or (b) the one, three,
or six-month London Interbank Offered Rate ("LIBOR") plus a defined margin rate
ranging from 0.5% to 2.0%. The weighted average interest rate in effect at
December 29, 1996 was 6.37%.
Deferred financing costs relating to the credit facility are amortized over
the life of the commitment. Amortization is included as interest expense in the
accompanying statement of operations. Deferred financing costs, net of
accumulated amortization, were $932,000 and $985,000, at December 31, 1995 and
December 29, 1996, respectively.
Covenants contained in the Credit Agreement include, but are not limited
to, provisions for the maintenance of minimum cash flow levels and net worth,
and restrictions on additional indebtedness, liens, investments, and payment of
dividends. The Company is in compliance with these covenants at December 29,
1996.
The aggregate maturities of long-term debt for the years subsequent to
December 29, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year
1997...................................................... $ 622
1998...................................................... 674
1999...................................................... 61,726
Thereafter................................................ --
-------
Total payments.................................... $63,022
=======
</TABLE>
4. PROVISION FOR STORE CLOSURES
During the year ended December 29, 1996, the Company recorded a charge to
expense relating to stores identified for closing during 1996, primarily related
to the exit from the Little Rock, Arkansas market. The provision is based on the
Company's best estimate of the costs associated with closing the stores, and is
comprised primarily of the anticipated lease obligations for these stores, and
losses on the disposal of store-related assets.
F-9
<PAGE> 86
CHIEF AUTO PARTS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASES
The Company leases facilities and equipment under noncancelable capital and
operating leases expiring in various years through 2028. The lease agreements
covering facilities generally require that the Company pay a pro rata share of
common area maintenance, insurance, utilities and ad valorem taxes, for which
provision has been made currently. Certain lease agreements covering facilities
require that the Company pay a percentage of sales over a specified minimum
level, for which provision has been made currently.
Future minimum lease payments under capital and operating leases at
December 29, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Fiscal year:
1997...................................................... $ 2,857 $ 30,181
1998...................................................... 2,705 27,966
1999...................................................... 2,649 25,490
2000...................................................... 2,702 22,848
2001...................................................... 2,631 19,587
Thereafter................................................ 16,693 78,389
------- --------
Total minimum lease payments...................... 30,237 $204,461
========
Less imputed interest..................................... 11,273
-------
Present value of lease payments........................... 18,964
Current portion........................................... 1,318
-------
Long-term portion......................................... $17,646
=======
</TABLE>
Rent expense under operating leases for the six months ended June 26, 1994
(Predecessor) and December 25, 1994 was $10,500,000 and $11,100,000,
respectively, and for the years ended December 31, 1995 and December 29, 1996
was $24,826,000 and $28,395,000, respectively. Contingent rentals were not
significant. Assets under capital leases consist of the following at December
31, 1995 and December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Buildings................................................... $23,509 $20,963
Furniture and equipment..................................... 393 393
------- -------
Total............................................. 23,902 21,356
Less accumulated amortization............................... 3,268 4,945
------- -------
Net............................................... $20,634 $16,411
======= =======
</TABLE>
F-10
<PAGE> 87
CHIEF AUTO PARTS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Components of income tax expense for the six months ended June 26, 1994
(Predecessor) and December 25, 1994 and for the years ended December 31, 1995
and December 29, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED
-------------- DECEMBER
JUNE DEC. ----------------
1994 1994 1995 1996
------ ---- ------ ------
<S> <C> <C> <C> <C>
Current:
Federal........................................ $1,009 $434 $2,950 $1,261
State.......................................... 374 103 1,050 450
Deferred:
Federal........................................ -- -- 1,500 (1,352)
------ ---- ------ ------
Total.................................. $1,383 $537 $5,500 $ 359
====== ==== ====== ======
</TABLE>
Income tax expense differs from the amount computed by applying the U.S.
federal income tax rate (34%) because of the effect of the following items (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED
----------------- DECEMBER
JUNE DEC. ----------------
1994 1994 1995 1996
------ ------- ------ ------
<S> <C> <C> <C> <C>
Tax at U.S. federal rate....................... $ 952 $(2,571) $5,093 $ 497
State income taxes, net of U.S. federal
benefit...................................... 247 68 693 297
Goodwill amortization.......................... -- 243 486 486
Tax assets for which no benefit was
recognized................................... 157 2,767 -- --
Benefit of previously unrecognized tax
assets....................................... -- -- (1,144) (834)
Other, net..................................... 27 30 372 (87)
------ ------- ------ ------
Total................................ $1,383 $ 537 $5,500 $ 359
====== ======= ====== ======
</TABLE>
At December 29, 1996, the Company had an alternative minimum tax credit
carryforward of $1,762,000 which has no expiration.
The major deferred tax asset (liability) items at December 31, 1995 and
December 29, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Depreciation................................................ $ 2,574 $ 1,146
Provisions for merchandise realignment, store closures and
related dispositions...................................... 5,178 6,697
Capital leases.............................................. 743 995
Deferred gains from sale leasebacks......................... 1,131 1,021
Inventory cost capitalization............................... 1,503 1,956
Accruals not deducted for tax purposes...................... 14,606 15,845
Tax credit carryforwards.................................... 2,105 1,762
Unfavorable lease obligations............................... 1,317 908
Other....................................................... (983) (804)
-------- --------
Net before valuation allowance.................... 28,174 29,526
Valuation allowance......................................... (20,424) (10,424)
-------- --------
Net deferred tax assets........................... $ 7,750 $ 19,102
======== ========
</TABLE>
F-11
<PAGE> 88
CHIEF AUTO PARTS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (CONTINUED)
At December 29, 1996, the Company had gross deferred tax assets of
$30,590,000, and gross deferred tax liabilities of $1,064,000. The net deferred
tax assets have been adjusted by a valuation allowance of $10,424,000. During
1996, in assessing the required valuation allowance against the deferred tax
asset, the Company concluded that it is more likely than not that a portion of
the deferred tax asset will be used to offset future tax. Accordingly, the
Company reduced the valuation allowance by $10,000,000 during the year ended
December 29, 1996, with a reduction in goodwill to reflect deferred tax assets
acquired in the Merger. Substantially all of the valuation allowance at December
29, 1996 relates to assets which were acquired in the Merger.
7. STOCKHOLDERS' EQUITY
Management Notes Receivable -- Several members of Company management have
purchased shares of Chief common stock, for which partial consideration is in
the form of notes made payable to Chief. The notes, which bear interest ranging
from 6.11% to 7.05% (payable annually), are due through 2003. Mandatory
prepayments of principal are due under certain circumstances.
Options -- In accordance with the Chief Auto Parts Inc. 1994 Executive
Option Plan (the "1994 Option Plan"), which became effective July 1, 1994,
options to purchase 5,488 shares of common stock can be granted to certain
employees and directors, at an exercise price of $1,420 per share. The options
become exercisable (vest) in 25% increments on each anniversary of the date of
grant, and may be exercised at any time after becoming exercisable until the
options expire. The 1994 Option Plan will terminate on June 30, 2004.
A summary of the options for the years ended December 31, 1995 and December
29, 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Outstanding at beginning of year............................ 4,984 5,284
Granted..................................................... 300 --
Exercised................................................... -- --
Forfeited................................................... -- --
----- -----
Outstanding at end of year.................................. 5,284 5,284
===== =====
Exercisable at end of year.................................. 1,246 2,567
===== =====
</TABLE>
The Company accounts for the 1994 Option Plan under APB 25, under which no
compensation expense has been recognized for the options granted because the
exercise price has equaled the fair value of the Company's common stock at the
date of grant.
The Company adopted SFAS 123 during 1996, for disclosure purposes only.
During the phase-in period of SFAS 123, the Company is required to disclose pro
forma information regarding the options granted in 1995. For SFAS 123 purposes,
the fair value of the options granted during 1995 was estimated using the
Black-Scholes options pricing model, and the pro forma effect on the Company's
net income for the years ended December 31, 1995 and December 29, 1996 was
insignificant.
Warrants -- In conjunction with the Merger, stock purchase warrants were
issued to the Predecessor's equityholders, exercisable for an aggregate of 10%
of the outstanding shares of common stock of the Company on a fully-diluted
basis, after the issuance of stock and stock options to management. At December
29, 1996, 6,090 shares may be purchased under the warrants, at an exercise price
of $1,655 per share. The exercise price is increased quarterly by an interest
factor. All of the warrants can be exercised in whole or in part, are
transferable under certain conditions, and contain provisions requiring the
Company to reserve a number of authorized and unissued shares sufficient to
exercise the warrants at any time. The number of shares issuable is subject to
adjustment under anti-dilution provisions contained in the warrants. The
warrants expire on June 27, 2004.
F-12
<PAGE> 89
CHIEF AUTO PARTS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution benefit plan covering
substantially all employees with more than one year of service. Plan assets,
distributions and reporting are administered by a third party. The plan's assets
include, at the participant's choice, a guaranteed interest fund, a government
securities fund, a stock emphasis balanced fund, and a U.S. stock fund.
Employees may contribute to their individual accounts, and Chief may provide a
matching contribution. During the six months ended June 26, 1994 (Predecessor)
and December 25, 1994, Chief contributed approximately $200,000 on a combined
basis to the plan. During the years ended December 31, 1995 and December 29,
1996, Chief contributed approximately $200,000 and $300,000, respectively, to
the plan.
Chief provides health and other insurance benefits for employees and their
dependents through health maintenance organizations ("HMO"). Prior to January 1,
1996, the Company also offered an indemnity plan to employees, which has been
discontinued. For the six months ended June 26, 1994 (Predecessor) and December
25, 1994, Chief paid $600,000 and $441,000, respectively, through the indemnity
plan and for the year ended December 31, 1995, paid total claims of
approximately $843,000 through the indemnity plan.
In accordance with the Chief Auto Parts Inc. 1994 Executive Target Bonus
Plan (the "Bonus Plan"), which became effective July 1, 1994, key employees of
the Company may earn bonuses if targeted levels of income are obtained by Chief.
At their option, plan participants may elect to defer such bonuses to future
years. The Bonus Plan will terminate on June 30, 2004. The deferred compensation
expense for this plan during the six months ended December 25, 1994 was $779,000
and during the years ended December 31, 1995 and December 29, 1996 was
$1,558,000 each year.
9. SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents. During the stated periods below, noncash investing and
financing activities were as follows:
- Six months ended December 25, 1994: noncash assets of $13,300,000
(principally property and equipment) and noncash liabilities of
$20,600,000 (principally capital leases) were acquired or assumed in the
Merger.
- Year ended December 29, 1996: capital leases of $2,396,000 were retired.
10. RELATED PARTIES
At December 29, 1996, 94.6% of Chief's outstanding common stock was owned
collectively by The Principal Fund and four affiliates of The Principal Fund.
The remaining outstanding common stock is owned by members of Chief management
and a member of the Company's board of directors. As described at Note 7,
several members of Chief management made notes payable to Chief in conjunction
with their purchase of Chief common stock. Equityholders at the date of the
Merger received stock purchase warrants, as described at Notes 2 and 7. The
warrant holders are comprised of current and former employees of the Company, a
former member of the Predecessor's board of directors, and the Predecessor's
senior lender and major equityholder.
11. COMMITMENTS AND CONTINGENCIES
On March 30, 1994, an administrative proceeding was initiated by the United
States Equal Employment Opportunity Commission, alleging that certain of the
Predecessor Company's employment practices might have been discriminatory. On
December 20, 1996, this matter was settled, at amounts less than previously
accrued and $1.2 million was credited to expense.
F-13
<PAGE> 90
CHIEF AUTO PARTS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company is the defendant in two lawsuits alleging that the Company
failed to pay store managers and associate store managers in California for
overtime compensation as required by California law. On September 21, 1993, a
lawsuit was filed in the Superior Court of California, County of Alameda, by a
former manager, alleging that the Company failed to pay store managers and
associate store managers in California overtime compensation. In December 1994,
the court denied class certification. Two hundred and forty two individual
claims have been added to the initial suit. In addition to the claims filed in
Alameda County, on March 5, 1996, 15 current and former employees filed a
lawsuit based on the same claims, in the Superior Court of California, County of
San Joaquin. The Company is vigorously defending against the claims of all
plaintiffs.
In September 1996, the Company submitted to binding arbitration with
respect to eight of the Alameda County plaintiffs. On March 10, 1997, the
arbitrator ruled in favor of the eight plaintiffs involved in the arbitration
with respect to liability and determined that these eight plaintiffs are
entitled to compensation for overtime hours worked, certain penalties and
interest and reasonable attorney's fees and costs of arbitration. However, the
arbitrator has not yet made a determination with respect to the amount of
damages. This arbitration decision has no binding precedential or stare decisis
effect on the remaining 235 plaintiffs' cases. However, regardless of the
outcome of the damage phase of the arbitration, the Company may have to litigate
or arbitrate the remaining cases and may incur significant legal expenses in
connection therewith, and the Company could be subject to significant
compensatory damages. In addition, there are approximately 700 store managers
and associate store managers previously or currently employed by the Company in
California who have not brought or joined in the suit against the Company.
Following the Alameda court's denial of class certification to the plaintiffs,
the court required the Company to send notice in October 1995 to all potential
plaintiffs (current and former managers as of that date) notifying them of this
action and providing them the opportunity to contact the plaintiffs' attorney.
The Company has recorded a provision for potential losses related to the
lawsuits, but management is unable to predict the outcome of the damage phase of
the arbitration or the remaining lawsuits, or the probability of additional
lawsuits, at this time. However, if a significant number of plaintiffs were to
prevail on all elements of their claims against the Company or if a significant
number of additional current or former managers were to bring suit and prevail
as noted above, it could have a material adverse effect on the Company.
The Company has been and is involved in various other legal proceedings.
Management believes that such other litigation is routine in nature and
incidental to the conduct of its business, and that none of such other
litigation, if determined adversely to the Company, would have a material
adverse effect, individually or in the aggregate, on the Company's financial
position or results of operations.
12. OTHER ACCRUED LIABILITIES
The following is a summary of other accrued liabilities at December 31,
1995 and December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Store-closing provision..................................... $ 1,794 $ 2,065
Insurance reserves.......................................... 3,109 2,382
Other (including legal)..................................... 14,012 11,512
------- -------
Other accrued liabilities................................... $18,915 $15,959
======= =======
</TABLE>
F-14
<PAGE> 91
CHIEF AUTO PARTS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER NONCURRENT LIABILITIES
The following is a summary of other noncurrent liabilities at December 31,
1995 and December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Accrued average rent........................................ $12,031 $12,394
Store-closing provision..................................... 5,474 10,384
Unfavorable lease obligations, net.......................... 4,343 3,434
Deferred compensation....................................... 3,117 4,675
Deferred income from sale-leasebacks........................ 2,618 2,340
Other (including legal)..................................... 1,266 7,442
------- -------
Other noncurrent liabilities................................ $28,849 $40,669
======= =======
</TABLE>
14. PRO FORMA MARCH 30, 1997 LONG-TERM DEBT AND EQUITY (UNAUDITED)
The pro forma March 30, 1997 long-term debt and equity represent the March
30, 1997 long-term debt and equity as adjusted for the following items:
Long-term debt -- the sale of senior notes, the repayment of the Credit
Agreement and the initial borrowing under a new credit facility; Equity -- the
exercise of stock options, the repayment of a portion of the management notes
receivable, the write-off of the unamortized deferred financing costs relating
to the Credit Agreement, and a distribution to stockholders; all of the
foregoing as if done on March 30, 1997.
F-15
<PAGE> 92
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<PAGE> 93
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 94
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 95
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 96
[ARTWORK]
Photographs of interior of Chief stores and employees. Text "Quality
Products -- Nationally recognized name-brand products ensure that Chief's
customers always get the quality and value that they demand; Dedicated Service
- -- State-of-the-art testing equipment and well trained employees help Chief
Auto Parts deliver the finest in customer service."
<PAGE> 97
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 9
The Recapitalization.................. 15
Use of Proceeds....................... 15
Benefits to Related Parties........... 15
Capitalization........................ 16
Selected Financial and Other Data..... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 27
Management............................ 37
Principal Stockholders................ 45
Certain Transactions.................. 47
Description of New Credit Facility.... 48
Description of the Notes.............. 49
Underwriting.......................... 72
Notice to Canadian Residents.......... 73
Legal Matters......................... 74
Independent Accountants............... 74
Available Information................. 74
Index to Financial Statements......... F-1
</TABLE>
---------------------
UNTIL AUGUST 20, 1997 (90 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 ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
[CHIEF AUTO PARTS LOGO]
CHIEF AUTO PARTS INC.
$130,000,000
10 1/2% SENIOR NOTES DUE 2005
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
SALOMON BROTHERS INC
- ------------------------------------------------------
