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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 333-24029
CHIEF AUTO PARTS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE ONE LINCOLN CENTRE, SUITE 200 13-3440178
(State or other jurisdiction of 5400 LBJ FREEWAY (IRS Employer Identification No.)
incorporation or organization) DALLAS, TEXAS 75240-6223
(Address of principal executive offices) (Zip Code)
</TABLE>
(972) 341-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
There were 53,781.03 shares of the registrant's common stock ($.01 par value)
outstanding as of March 27, 1998. The registrant does not have any publicly
traded shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE: None
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CHIEF AUTO PARTS INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C> <C>
PART I Item 1 -- Business............................................................................. 3
Item 2 -- Properties........................................................................... 10
Item 3 -- Legal Proceedings.................................................................... 10
Item 4 -- Submission of Matters to a Vote of Security Holders ................................. 11
PART II Item 5 -- Market for the Company's Common Stock and Related Stockholder Matters ............... 11
Item 6 -- Selected Historical Financial Data................................................... 12
Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................................... 14
Item 8 -- Financial Statements and Supplementary Data.......................................... 21
Item 9 -- Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................................... 37
PART III Item 10-- Directors and Executive Officers of the Company...................................... 37
Item 11-- Executive Compensation............................................................... 38
Item 12-- Security Ownership of Certain Beneficial Owners and Management ...................... 45
Item 13-- Certain Relationships and Related Transactions....................................... 46
PART IV Item 14-- Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 48
Signatures..................................................................................... 49
Financial Statement Schedule................................................................... 50
Index to Exhibits.............................................................................. 51
</TABLE>
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PART I
Throughout this report, Chief Auto Parts Inc. is referred to as "Chief" or "the
Company." References to the Company's fiscal year mean the 52- or 53-week period
ending on the last Sunday in December. Fiscal 1997 ended on December 28, 1997
(52 weeks) ("1997"), fiscal 1996 ended on December 29, 1996 (52 weeks) ("1996"),
fiscal 1995 ended on December 31, 1995 (53 weeks) ("1995"), fiscal 1994 ended on
December 25, 1994 (52 weeks) ("1994"), and fiscal 1993 ended on December 26,
1993 (52 weeks) ("1993").
The information contained in this Form 10-K includes statements regarding
matters which are not historical facts (including statements as to the
Company's plans, beliefs, intentions, anticipations or expectations) which are
forward-looking statements within the meaning of the federal securities laws.
Because such forward-looking statements involve certain risks, uncertainties
and contingencies, the Company's actual results and the timing of certain
events could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include those discussed in the Sections
captioned "Item 1. Business," "Item 3. Legal Proceedings," and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and those risk factors discussed in Exhibit 99.1 hereto. The
Company undertakes no obligation and does not intend to update, revise or
otherwise publicly release the result of any revisions to these
forward-looking statements, which revisions may be made to reflect any future
events or circumstances, other than through the Company's Quarterly Reports on
Form 10-Q and Annual Report on Form 10-K.
ITEM 1. 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 552 retail stores as of
December 28, 1997 located in five states, primarily concentrated in Southern
California and Texas. 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 17,000 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.
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 The Southland Corporation
("Southland") purchased this business in December 1978. 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.
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 (the "Merger"). Pursuant to a subadvisory agreement, Oaktree Capital
Management LLC ("Oaktree") manages The Principal Fund. The acquisition provided
the Company with access to growth capital, enabling management to focus on
operational improvements and growth.
In May 1997, the Company completed a public offering of $130 million of 10.5%
Senior Notes (the "Senior Notes"), which together with a series of related
transactions resulted in the recapitalization of the Company (collectively, such
transactions comprise the "Recapitalization"). The primary components of the
Recapitalization were as follows:
o The Company issued the Senior Notes and common stock (from the
exercise of stock options), and made its initial borrowing under a
new $100 million revolving credit loan (the "$100 million Revolving
Credit Loan").
o A cash distribution of $75 million was made to stockholders, and the
existing revolving credit loan (the "$80 million Revolving Credit
Loan") was repaid in full. In addition, the Company paid accrued
employee incentive compensation.
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BUSINESS STRATEGY
Over the past four years the Company has implemented a business strategy
designed to transform Chief from a chain of smaller automotive parts convenience
stores to a premier full-line auto parts and accessories retailer for the DIY
customer. The central elements of the Company's business strategy include store
expansions, relocations and remodeling; expanded number of SKUs; competitive
pricing; superior customer service; and enhancements to information systems.
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. Chief has increased the average size of its
stores to 3,945 square feet at December 28, 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 December 28, 1997.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
STORE SIZE OF STORES OF STORES
---------- --------- ---------
<S> <C> <C>
5,000 sq. ft. or greater 120 22
4,000 to 4,999 sq. ft 116 21
3,500 to 3,999 sq. ft 163 29
3,000 to 3,499 sq. ft 48 9
Less than 3,000 sq. ft 105 19
----- -----
Total 552 100
===== =====
</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 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. Seventeen locations are open
24 hours per day. The Company 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, on "high steel" shelving behind a parts
counter, attended by a parts-knowledgeable salesperson.
Geographic Distribution
During 1997, the Company's stores were organized into five geographic regions.
Effective in January 1998, the regions were realigned into six regions to better
accommodate planned growth in specific markets. Each region is administered by a
Regional Vice-President who oversees from four to eight District Managers.
District Managers are responsible for eight to 12 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 (which during the fourth quarter of
1997 the Company began to relocate to a new facility in nearby Ontario,
California). See "Item 1. Business -- Warehouse and Distribution" and "Item 2.
Properties".
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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 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 plans to open approximately 70 new stores, approximately half of
them as relocations of existing stores, and to expand approximately five
stores in 1998, primarily in its existing markets. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity, Capital Resources and Financial Condition." As a result of its new,
relocated and expanded stores, the Company expects that by the end of 1998,
only 12% 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 17,000 SKUs and Chief stores with commercial sales capabilities
carry approximately 21,000 SKUs.
The following table sets forth the Company's store development activities during
the years indicated:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Stores at beginning of period 544 520 495 492 495
New stores 23 51 34 18 14
Relocated stores 15 12 3 6 1
Closed stores (including relocated) (30) (39) (12) (21) (18)
------ ------ ------ ------ ------
Stores at end of period 552 544 520 495 492
====== ====== ====== ====== ======
Remodeled stores 24 159 90 38 29
====== ====== ====== ====== ======
Avg. sq. ft. per store at end of period 3,945 3,695 3,489 3,408 3,321
====== ====== ====== ====== ======
</TABLE>
PRODUCTS
Product Selection. The Company offers a broad selection of nationally recognized
name brand and private label automotive products. The product mix of
approximately 17,000 SKUs in the Company's typical store is designed to cover a
broad range of specific vehicle applications and to meet current customer
demand, and 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, Raybestos
brakes, Champion batteries, Bosch spark plugs and oxygen sensors and Gates belts
and hoses.
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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 1997, the
Company purchased products from approximately 800 suppliers, and no single
supplier accounted for more than 11% of the Company's total purchases. Echlin,
Inc., one of the Company's strategic partners and suppliers of ignition parts,
fuel pumps, brakes and brake parts, accounted for approximately 10.9% of the
Company's total purchases during 1997, and GNB Incorporated, a supplier of
batteries, accounted for approximately 11.0% of the Company's total purchases
during 1997. The Company does not have written agreements with either Echlin,
Inc. or GNB Incorporated. Management believes that the Company's relationships
with suppliers are excellent. Management also believes that alternative sources
of supply exist, at similar cost, for substantially all types of products sold
by the Company.
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.
WAREHOUSE AND DISTRIBUTION
Throughout 1997, the Company serviced all its stores from two warehouse
distribution centers, one located in Cerritos, California, near Los Angeles and
one in Seagoville, Texas, near Dallas. During the fourth quarter of 1997, the
Company began the process of relocating its Cerritos, California warehouse
distribution center to a new facility in Ontario, California. The process should
be completed by the end of the first quarter of 1998. The new facility consists
of 447,000 square feet, as compared to 304,000 at the Cerritos location. Both of
these facilities are leased under operating leases. The remaining lease
commitment for the Cerritos location will be absorbed through a sublet
arrangement, and as such there should be minimal future cash outlays for this
location after the sublet has commenced. The Seagoville facility is owned by the
Company.
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 and Beck-Arnley
import parts (see "Commercial Sales Program" below), 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
Seagoville and Ontario distribution centers:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER
TOTAL SIZE OF STORES
DISTRIBUTION CENTER AREA SERVED (SQ. FT.) SERVED
------------------- ----------- --------- ------
<S> <C> <C> <C>
Seagoville, TX Texas, Tennessee 245,000 135
Ontario, CA California, Nevada, Arizona 447,000 417
------- -------
Total 692,000 552
======= =======
</TABLE>
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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. In 1995, the Company began to develop its commercial sales
program, marketed as the Professional Parts Warehouse ("PPW"), by providing
service to commercial customers from existing Company stores. The PPW program is
targeted towards the professional installer segment (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. The Company intends to capitalize on its reputation for
carrying quality name brand parts and superior customer service in developing
the commercial sales program.
As of December 28, 1997, the Company has implemented the PPW program in 35
existing retail stores, including 20 in California, 13 in Texas and two in
Nevada, of which 18 were added during 1997. The Company believes that its
selective roll-out of this PPW program will lead to continued growth in sales to
commercial customers in 1998.
Chief's stores with commercial sales capability generally stock approximately
21,000 SKUs, compared to an average of 17,000 SKUs in other Company stores.
Commercial stores typically maintain two delivery trucks and four dedicated
drivers in order to make prompt deliveries 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, the Company has implemented a program in certain of its commercial
stores in which it stocks 6,000 SKUs of Beck-Arnley products, a quality name
brand of import replacement parts, in addition to the approximately 21,000 SKUs
normally stocked by commercial stores. 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.
STORE 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 store
information systems constitute an important part of the Company's operations and
growth strategy.
Each of the Company's stores has a point-of-sale system that is linked to an
electronic parts catalog ("EPC"). The EPC has been designed to improve the
Company's competitiveness by offering improved service to customers. 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. Management believes that 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.
The Company has developed and installed 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 completed the
installation of the perpetual inventory system in all stores during 1997.
During 1997, the Company completed the installation of portable radio frequency
("RF") computer terminals in all stores to reduce labor, increase productivity
and facilitate inventory management. The RF terminals validate the inventory in
stock in each store and will match such information with the perpetual inventory
system.
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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
effectively serve 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. To better serve its customers, the
Company has adopted several service initiatives, including: free testing of
ignition control modules, 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 knowledge by its store personnel enabling
them to effectively advise customers on product selection and use. 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,
expanded product selection, and convenient locations. The Company's advertising
strategy includes television, radio, in-home circular and outdoor billboard
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 increased product movement. The
Company's bright, contemporary logo and supporting outdoor signage are designed
to be visible and legible to consumers day and night. In 1997, the Company
introduced a new interior decor package designed to significantly enhance the
ease of shopping, emphasize the Company's overall market positioning, and draw
attention to the high quality national name brands and knowledgeable customer
service available at each Chief store. Much of the Company's advertising is
co-sponsored by product vendors.
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COMPETITION
The Company competes principally in the DIY segment of the automotive
aftermarket. Although the number of competitors and the level of competition
vary by market area, the DIY market is highly fragmented and generally very
competitive. The Company competes primarily with national and regional
automotive aftermarket retailers such as AutoZone, Inc., CSK Auto Corporation
(Checker, Schuck's, Kragen), Grand Auto, O'Reilly (Hi-Lo) Automotive, Inc. and
The Pep Boys -- Manny, Moe and Jack, Inc. The Company's competitors also include
(i) 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 (ii) 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 and Carquest. Traditional
wholesalers or jobber retailers, such as NAPA, and retail chains also provide
significant competition for the Company's commercial business. The Company
believes that 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 and jobbers that are not part of a chain or associated
with other retail or jobber chains.
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 than the Company.
EMPLOYEES
As of December 28, 1997, the Company employed a total of 5,598 employees,
consisting of 3,349 full-time employees and 2,249 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.
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
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<PAGE> 10
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.
ITEM 2. PROPERTIES
As of December 28, 1997, the Company owned 48 of its 552 operating stores and
leased or subleased the remaining 504 stores from third parties under leases
expiring between 1998 and 2028. The total square footage of the operating stores
at that date was 2,240,000. Seventeen 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 its 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 existing leases on
commercially reasonable terms. The minimum lease term on 62 of the Company's
stores under 3,500 square feet will expire before the year 2000 and 21 of the
Company's stores under 3,500 square feet are Company-owned. See Note 6 to Notes
to Financial Statements.
The table below shows the location and number of the Company's 552 operating
stores, eight principal offices and two warehouses by state as of December 28,
1997:
<TABLE>
<CAPTION>
NUMBER OF
OPERATING NUMBER OF NUMBER OF
STATE STORES OFFICES WAREHOUSES
----- ------ ------- ----------
<S> <C> <C> <C>
California 390 4 1
Texas 127 4 1
Nevada 24 - -
Tennessee 8 - -
Arizona 3 - -
--- --- ---
Total 552 8 2
=== === ===
</TABLE>
During the fourth quarter of 1997, the Company began the process of relocating
its Cerritos, California distribution center to a new facility in Ontario,
California. The process should be completed by the end of the first quarter of
fiscal 1998. The new facility consists of 447,000 square feet, as compared to
304,000 at the Cerritos location. Both of these facilities are leased under
operating leases. The remaining lease commitment for the Cerritos location will
be absorbed through a sublet arrangement, and as such there should be minimal
future cash outlays for this location after the sublet has commenced.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a class action entitled "Doug Winfrey, et. al. on
their own behalf and on behalf of a class and all others similarly situated, v.
Chief Auto Parts Inc., et. al.," filed in The Superior Court of California,
County of San Joaquin on August 22, 1995 and then transferred to The Superior
Court of California, County of San Francisco on October 26, 1995. The Superior
Court denied the plaintiffs' motion for class certification on December 7, 1996.
On February 6, 1998, the Court of Appeal reversed the Superior Court's order
denying class certification. No substantive proceedings regarding the merits of
this lawsuit have yet occurred.
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<PAGE> 11
The plaintiffs allege that the Company has a policy and practice of
denying hourly employees in California mandated rest periods during their
scheduled hours of work. The plaintiffs are seeking damages, restitution,
disgorgement of profits, statutory penalties, declaratory relief, injunctive
relief, prejudgment interest, and reasonable attorneys fees, expenses and costs.
Management is unable to predict the outcome of this lawsuit at this time. The
Company believes that the potential damages recoverable by any single plaintiff
are minimal. However, if the plaintiff class were to prevail on all of their
claims, the amount of damages could be substantial. The Company is vigorously
defending against this action.
The Company currently and from time to time is involved in various other legal
proceedings incidental to the conduct of its business. Although the amount of
liability that may result from these proceedings cannot be ascertained, the
Company does not currently believe that, in the aggregate, they will result in
liabilities material to the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the quarter ended
December 28, 1997.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common stock. As
of March 15, 1998, there were 16 record holders of the Company's common stock.
The Company did not declare any dividends on outstanding common stock during
fiscal 1996. During fiscal 1997, the Company made a $75 million distribution to
stockholders. The Company's $100 million Revolving Credit Loan and the Senior
Notes Indenture restrict the Company's ability to pay dividends. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity, Capital Resources and Financial Condition."
As part of the Recapitalization, the Company sold 4,839.97 shares of Common
Stock pursuant to the exercise of outstanding options by certain management
employees for aggregate proceeds of $6.9 million. This sale of common stock was
made pursuant to the Company's 1994 Executive Option Plan and was exempt from
registration under Section 4(2) of the Securities Act of 1933 and the rules
promulgated thereunder.
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<PAGE> 12
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial and other data of the Company
for the five fiscal years ended December 28, 1997. The historical financial data
for the three fiscal years ended December 28, 1997 were derived from the audited
Financial Statements of the Company appearing elsewhere in this Form 10-K. The
historical financial data for the two fiscal years ended December 25, 1994 were
derived from audited financial statements of the Company, which are not
presented herein. 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 "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
SUCCESSOR (a) PREDECESSOR (a)
-------------------------------------------- ----------------------
YEARS ENDED SIX MONTHS SIX MONTHS
------------------------------- ENDED ENDED YEAR ENDED
DEC. 28, DEC. 29, DEC. 31, DEC. 25, JUNE 26, DEC. 26,
1997 1996 1995 1994 1994 1993
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER STORE SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $464,665 $438,182 $429,047 $203,878 $195,286 $374,618
Cost of goods sold, warehousing and distribution (b) 270,150 251,764 251,628 133,390 114,452 224,543
-------- -------- -------- -------- -------- --------
Gross profit (b) 194,515 186,418 177,419 70,488 80,834 150,075
Selling, general and administrative (c) 160,086 167,064 145,829 70,500 68,642 131,125
Depreciation and amortization 14,259 11,622 10,397 5,020 3,626 7,523
-------- -------- -------- -------- -------- --------
Operating income (loss) (b) (c) 20,170 7,732 21,193 (5,032) 8,566 11,427
Interest expense, net 15,357 6,203 6,009 2,533 5,807 12,014
Other expense (income), net 18 66 205 (4) (41) (1,183)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes 4,795 1,463 14,979 (7,561) 2,800 596
Income tax expense 1,935 359 5,500 537 1,383 370
-------- -------- -------- -------- -------- --------
Net income (loss) (b) (c) $ 2,860 $ 1,104 $ 9,479 $ (8,098) $ 1,417 $ 226
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and equivalents $ 1,176 $ 1,140 $ 1,202 $ 1,133 $ 1,116 $ 1,095
Working capital (deficit) 70,799 47,987 23,961 17,484 (26,075) (21,705)
Total assets 314,735 298,348 254,419 229,659 151,414 148,189
Total debt, including current maturities (d) 191,855 81,986 63,471 61,130 108,422 117,935
Stockholders' equity (deficit) (e) 7,198 71,480 70,275 60,646 (47,303) (48,820)
SELECTED OPERATING DATA:
Number of Stores:
Beginning of period 544 520 495 493 492 495
New stores 23 51 34 9 9 14
Relocated stores 15 12 3 2 4 1
Closed stores (including relocated) (30) (39) (12) (9) (12) (18)
-------- -------- -------- -------- -------- --------
End of period 552 544 520 495 493 492
======== ======== ======== ======== ======== ========
Remodeled stores 24 159 90 25 13 29
Average square footage per store(f) 3,945 3,695 3,489 3,408 3,362 3,321
Total store square footage at period end (in thousands)(f) 2,240 2,084 1,848 1,694 1,673 1,639
Average net sales per store(f) $ 848 $ 824 $ 845 $ 413 $ 397 $ 759
Average net sales per store square foot(f) $ 215 $ 223 $ 242 $ 121 $ 118 $ 229
Percentage change in comparable store net sales(g) 1.8% (2.6)% 1.8% 3.9% 6.0% 1.8%
EBITDA(h) $ 34,411 $ 33,288 $ 31,385 $ 12,869 $ 12,233 $ 20,133
EBITDA margin(i) 7.4% 7.6% 7.3% 6.3% 6.3% 5.4%
Gross margin(b) 41.9% 42.5% 41.3% 34.6% 41.4% 40.1%
Capital expenditures $ 17,009 $ 23,275 $ 11,822 $ 6,512 $ 5,885 $ 6,178
Ratio of earnings to fixed charges(j) 1.2x 1.1x 2.0x (j) 1.3x 1.0x
</TABLE>
- --------------
(a) The Company was party to a merger in June 1994. "Successor" refers to Chief
Auto Parts Inc. subsequent to the Merger; "Predecessor" refers to Chief
Auto Parts Inc. prior to the Merger. The Merger was accounted for using the
purchase method, in accordance with Accounting Principles Board Opinion No.
16, "Business Combinations". The assets and liabilities of the Predecessor
were revalued and significant adjustments to the assets acquired
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<PAGE> 13
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.
(b) Six months ended December 25, 1994 includes a $12.9 million Merger-related
inventory charge.
(c) 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) During the year ended December 28, 1997, in conjunction with the
Recapitalization, the Company made a cash distribution of $75.0 million to
the stockholders.
(f) Average square footage per store, average net sales 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.
(g) 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.
(h) EBITDA represents income (loss) before interest expense (net), income
taxes, depreciation and amortization and, (i) 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 (ii) in six months ended December 25, 1994, excludes a
$12.9 million Merger-related inventory charge. EBITDA is used by the
Company for the purpose of analyzing operating performance, leverage and
liquidity. Additionally, the indenture under which the Senior Notes were
issued and the $100 million Revolving Credit Loan contain various
restrictive covenants which are derived from EBITDA as defined in each of
those agreements. 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.
(i) EBITDA margin represents EBITDA as a percentage of net sales.
(j) 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 six months ended December 25, 1994, earnings were
insufficient to cover fixed charges by $7.6 million, and accordingly such
ratio is not presented.
-13-
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Item 6.
Selected Historical Financial Data" and the Financial Statements of the Company
and the related notes thereto included elsewhere in this Form 10-K.
GENERAL
Repositioning Program -- In June 1994, The Principal Fund and certain of its
affiliates acquired Chief. The acquisition provided the Company with access to
growth capital, 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. The repositioning program was completed during the first quarter of 1997.
Since June 1994, the Company has invested approximately $58.6 million in total
capital expenditures in connection with its program to reposition Chief in the
automotive aftermarket marketplace and has more than doubled the average number
of SKUs in its stores. During this period, the Company remodeled 298 of its
stores, opened 117 new stores, relocated 32 stores to larger, more favorable
locations averaging 5,600 square feet (an increase from approximately 2,730
square feet for such stores prior to relocation), closed 58 small or
underperforming stores and introduced Chief's commercial sales program into 35
existing stores. As of December 28, 1997, 79% of the Company's current stores
have either been remodeled or opened as new since June 1994.
Recapitalization -- In May 1997, as described in Note 2 to Notes to Financial
Statements, the Company completed a public offering of the Senior Notes, which
together with a series of related transactions resulted in the recapitalization
of the Company. The primary components of the Recapitalization were as follows:
o The Company issued the Senior Notes and common stock (from the
exercise of stock options), and made its initial borrowing under the
$100 million Revolving Credit Loan.
o A cash distribution of $75 million was made to stockholders, the $80
million Revolving Credit Loan was repaid in full, and the Company
paid accrued employee incentive compensation.
Store Activity -- The following table summarizes store activity during the last
four fiscal years:
<TABLE>
<CAPTION>
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Stores at beginning of period 544 520 495 492
New stores 23 51 34 18
Relocated stores 15 12 3 6
Closed stores (including relocated) (30) (39) (12) (21)
------ ------ ------ ------
Stores at end of period 552 544 520 495
====== ====== ====== ======
Remodeled stores 24 159 90 38
====== ====== ====== ======
Avg. sq. ft. per store at end of period 3,945 3,695 3,489 3,408
====== ====== ====== ======
</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.
-14-
<PAGE> 15
Chief Auto Parts Inc.
Management's Discussion, cont.
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.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales 100.0 100.0 100.0
Cost of goods sold, warehousing and distribution 58.1 57.5 58.7
----- ----- -----
Gross profit 41.9 42.5 41.3
Selling, general and administrative 34.5 38.1 34.0
Depreciation and amortization 3.1 2.6 2.4
----- ----- -----
Operating income 4.3 1.8 4.9
Interest expense, net 3.3 1.4 1.4
Other expense, net -- -- --
----- ----- -----
Income before income taxes 1.0 0.4 3.5
Income tax expense 0.4 0.1 1.3
----- ----- -----
Net income 0.6 0.3 2.2
===== ===== =====
OTHER DATA:
EBITDA (a) 7.4 7.6 7.3
===== ===== =====
</TABLE>
- --------------
(a) As defined in note (h) to the table at "Item 6. Selected Historical
Financial Data."
1997 VS. 1996
Net sales. Net sales increased by $26.5 million, or 6.0%, to $464.7 million in
1997 from $438.2 million in 1996. The increase was primarily attributable to
growth in the Company's store base (38 stores were opened in 1997) as well as
comparable stores sales growth. Comparable store sales increased during 1997 by
$7.7 million, or 1.8%, to $430.6 million from $422.9 million in 1996. The
comparable store sales increase resulted from a higher average customer
transaction size (as measured in dollars), which was partially offset by a lower
average number of customer transactions per store.
Gross profit. Gross profit increased by $8.1 million, or 4.3%, to $194.5 million
in 1997 from $186.4 million in 1996 due principally to the increased sales
volume, the effect of which was partially offset by a lower gross profit margin
(41.9% in 1997 compared to 42.5% in 1996). The gross profit margin decrease
resulted from higher markdowns and sales discounts in 1997 than in 1996 (in
response to competitive factors), and fewer purchasing incentives provided by
vendors due to less remodeling and fewer new store openings.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") decreased by $7.0 million, or 4.2%, to $160.1
million in 1997 from $167.1 million in 1996. The decrease was primarily due to
an
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<PAGE> 16
Chief Auto Parts Inc.
Management's Discussion, cont.
unusual $14.0 million non-cash provision in 1996. The non-cash provision was for
store closings primarily related to the Company's exit from the Little Rock
market and legal reserves. Excluding the non-cash provision in 1996, SG&A
increased by $7.0 million, or 4.6%, in 1997, due principally to the increase in
the sales volume in 1997 and a corresponding increase in related expenses such
as store labor and occupancy costs. As a percentage of net sales, excluding the
unusual $14.0 million non-cash provision in 1996, SG&A decreased to 34.5% in
1997 from 34.9% in 1996. This 0.4% decrease was primarily attributable to lower
net advertising expenses and a credit to expense from the negotiation of
favorable lease terminations related to several closed stores, as well as lower
store labor related to remerchandising remodeled stores (as the repositioning
program was ongoing during 1996 but was completed early in 1997).
EBITDA. EBITDA increased by $1.1 million, or 3.3%, to $34.4 million in 1997 from
$33.3 million in 1996. The increase was principally the result of the increased
sales volume and gross profit.
Depreciation and amortization expense. Depreciation and amortization expense
increased by $2.6 million, or 22.7%, to $14.3 million in 1997 from $11.6 million
in 1996. The increase was primarily attributable to a higher depreciable asset
base in 1997 compared to 1996, most notably in leasehold improvements and
furniture and equipment. The asset base increased due to extensive store
remodeling throughout 1996, and to capital improvements made during 1997 and to
the opening of new stores.
Interest expense. Interest expense increased by $9.2 million, to $15.4 million
in 1997 from $6.2 million in 1996. The increase was due primarily to the
Recapitalization, which resulted in higher debt outstanding than in 1996.
Approximately $8.5 million of interest expense in 1997 related to the Senior
Notes, which had no equivalent in 1996.
Income taxes. The Company's effective income tax rate increased to 40.4% in 1997
from 24.5% in 1996, as the benefit of previously unrecognized tax assets
reflected in 1996 had no equivalent in 1997.
Net income. Net income increased by $1.8 million, or 159.1%, to $2.9 million in
1997 from $1.1 million in 1996 due to the factors discussed above.
1996 VS. 1995
Net sales. Net sales increased by $9.1 million, or 2.1%, to $438.2 million in
1996 from $429.0 million in 1995. The increase was primarily attributable to
higher new store sales in 1996 compared to 1995 (63 stores were opened in 1996
compared to 37 in 1995). The increase in new store sales offset a decrease in
comparable store sales during 1996. Additionally, 1995 consisted of 53 weeks
compared to 52 weeks in 1996; the additional one week's sales of $7.4 million in
1995 had no equivalent in 1996. On a comparable basis (52 weeks compared to 52
weeks), comparable store sales during 1996 decreased by $10.6 million, or 2.6%,
to $394.3 million in 1996 from $404.9 million in 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 1996 (159 stores were remodeled in 1996
compared to 90 in 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 1996 from $177.4 million in 1995 due to the increased sales volume and a
higher gross profit margin (42.5% in 1996 compared to 41.3% in 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. SG&A increased by $21.2 million,
or 14.6%, to $167.1 million in 1996 from $145.8 million in 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, SG&A increased to 34.9% in 1996
from 34.0% in 1995. This 0.9% increase was primarily
-16-
<PAGE> 17
Chief Auto Parts Inc.
Management's Discussion, cont.
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 1996 from
$31.4 million in 1995. 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 1996 from $10.4 million
in 1995. The increase was primarily attributable to a higher depreciable asset
base in 1996 compared to 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 1996 from $6.0 million in 1995. The increase was due primarily to a
higher average outstanding balance under the $80 million Revolving Credit Loan
in 1996 compared to 1995, offset partially by lower average interest rates
during 1996 compared to 1995.
Income taxes. The Company's effective income tax rate decreased to 24.5% in 1996
from 36.7% in 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
1996 from $9.5 million in 1995 due to the factors discussed above.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company utilizes funds generated from operations and borrowings under credit
facilities 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, information systems
improvements and distribution center improvements). At December 28, 1997, the
Company had net working capital of $70.8 million (compared to $48.0 million at
December 29, 1996) and $41.1 million available for borrowing under the $100
million Revolving Credit Loan (compared to $18.5 million at December 29, 1996
under the $80 million Revolving Credit Loan).
During 1997, the Company's principal sources of cash were $126.2 million from
the sale of the Senior Notes, $43.5 million from borrowings under the $100
million Revolving Credit Loan, and $6.9 million from the exercise of stock
options; collectively $176.6 million. These amounts were used primarily to
service working capital requirements (including the settlement of two lawsuits
for an aggregate amount of $9.0 million), fund capital expenditures of $17.0
million, pay a distribution of $75 million to stockholders, and to retire the
$80 million Revolving Credit Loan. During 1996, the Company's principal sources
of cash were $1.9 million from operations and $22.5 million from borrowings
under the $80 million Revolving Credit Loan, which were used primarily to fund
capital expenditures of $23.3 million. During 1995, the Company's principal
sources of cash were $9.1 million from operations and $4.0 million from
borrowings under the $80 million Revolving Credit Loan, which were used
primarily to fund capital expenditures of $11.8 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 since the
Merger. Capital expenditures increased by $11.5 million, or 96.9%, to $23.3
million in 1996 from $11.8 million in 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. During 1997, capital
expenditures were $17.0 million, which although $6.3 million lower than in 1996,
were nevertheless significantly higher than in 1995. The decrease in 1997
capital expenditures was due primarily to the completion of the repositioning
program during the first quarter of 1997. Merchandise inventories increased by
$7.8 million, or 5.5%, to $148.2 million in 1997 from $140.4 million in 1996,
which in turn reflected an increase of $32.8 million, or 30.5%, from $107.6
million in 1995,
-17-
<PAGE> 18
Chief Auto Parts Inc.
Management's Discussion, cont.
due to the new store growth, the remodeling program, the deliberate expansion of
Chief's SKU count in a typical retail store, which has more than doubled to an
average of 17,000 SKUs, since 1994, and other changes to product mix.
During the fourth quarter of 1997, the Company began the process of relocating
its Cerritos, California warehouse distribution center to a new facility in
Ontario, California. The process should be completed by the end of the first
quarter of fiscal 1998. The new facility consists of 447,000 square feet, as
compared to 304,000 at the Cerritos location. Both of these facilities are
leased under operating leases. The remaining lease commitment for the Cerritos
location will be absorbed through a sublet arrangement, and as such there should
be minimal future cash outlays for this location after the sublet has commenced.
The lease commitment for the Ontario location (initial term of ten years, plus
options) will be funded by operations.
During 1998, the Company plans to open approximately 70 new stores,
approximately half of them as relocations of existing stores, and to expand
approximately five stores. The total estimated capital expenditures for such new
store openings and existing store relocations and expansions is approximately
$13.6 million. The Company anticipates that substantially all of its new and
relocated stores during 1998 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 Company continued to expand its commercial sales program during 1997.
Marketed as the Professional Parts Warehouse, or PPW, the commercial sales
program is directed towards the professional installer segment. As of December
28, 1997, the Company had 35 PPW locations, 18 of which were added during 1997.
The Company plans to add more commercial locations during 1998, and to add
approximately 3,000 to 4,000 new items to the SKU counts at existing PPW
locations, such that the typical commercial location will carry approximately
24,000 to 25,000 SKUs.
The Company expects to broaden its commercial expansion during 1998 by
introducing a newly-developed depot store concept that will allow for further
market penetration in each of the Company's regions by adding approximately
20,000 to 25,000 new SKU items to be housed at strategically-located commercial
depot stores that will serve nearby Chief retail stores. Such depot stores will
carry approximately 40,000 to 45,000 SKUs, and are expected to be introduced
during 1998 (with initial funding provided via vendor participation), with an
expected broader implementation during 1999 and beyond. In addition, the Company
has implemented a program in certain of its commercial stores in which it stocks
6,000 SKUs of Beck-Arnley products, a quality name brand of import replacement
parts, in addition to the approximately 21,000 SKUs normally stocked by
commercial stores. 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.
During 1997, the Company completed the installation of portable radio frequency
("RF") computer terminals in all stores to reduce labor, increase productivity
and facilitate inventory management. The total cost of the RF project was
approximately $3.0 million. Enhancements are expected to be added to the RF
terminals during 1998 to allow for further inventory management capabilities,
the cost of which will primarily be in-house. In 1997, the Company upgraded its
IBM AS/400 CPU to facilitate technological growth, and the Company expects to
make additional upgrades during 1998. Additionally, to better accommodate the
Company's expansion that resulted from the repositioning program, and to allow
further growth and capacity, Chief expects to install several major information
systems improvements during 1998. The most significant systems improvements are
the replacement of the primary information system components, including major
financial, merchandising and distribution systems, at an estimated total cost of
approximately $3.0 million. The new systems are currently in process and are
expected to be phased in during 1998. The Company also expects to begin a
phased-in implementation of a new store point-of-sale system late in 1998, from
which point all new stores are expected to be equipped with the new system;
existing stores are expected to receive the new system in phases over the
following three years.
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<PAGE> 19
Chief Auto Parts Inc.
Management's Discussion, cont.
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 the
Senior Notes and capitalized leases) bears stated interest at rates that are
subject to fluctuation. The weighted average interest rate in effect on the $100
million Revolving Credit Loan at December 28, 1997 was 8.17%. The weighted
average interest rate in effect on the $80 million Revolving Credit Loan was
6.4% at December 29, 1996 and 8.5% at December 31, 1995.
YEAR 2000 COMPLIANCE
As described above in the Liquidity discussion, Chief is currently engaged in
the replacement of its primary information system components, including major
financial, merchandising and distribution systems. These new systems, which are
required in order to address the Company's recent and planned future growth, are
all Year 2000-certified. The estimated cost to implement these new systems,
which are currently scheduled to be phased into use during 1998, is
approximately $3.0 million.
Regarding other significant system components, such as the Company's present
store point-of-sales system, networks and personal computers, Chief will utilize
both internal and external resources to identify and assess the Year 2000
functionality of such components. The Company has initiated discussions with its
primary system vendors regarding Year 2000 compliance, and is currently testing
and authenticating such systems. Currently, the total cost of addressing the
Year 2000 issue is not expected to have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company has initiated formal communications with its primary business
partners to determine the extent to which the Company is exposed to failure by
those third parties to remediate their own Year 2000 conversion issues. There
can be no assurance that the systems of other companies on which the Company's
systems rely will be timely converted or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.
NEW ACCOUNTING STANDARDS
During 1997, the Company adopted Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure," which had no effect on
the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
In February 1998, the Board issued No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." Chief will adopt these statements
in 1998. As these statements only require additional disclosures in the
Company's financial statements, their adoption will not have any effect on the
Company's financial position or results of operations.
-19-
<PAGE> 20
Chief Auto Parts Inc.
Management's Discussion, cont.
FORWARD-LOOKING STATEMENTS
The information discussed above in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains statements regarding
matters that are not historical facts (including statements as to plans,
beliefs, intentions, anticipations or expectations of the Company) which are
forward-looking statements. Because such forward-looking statements include
risks, uncertainties and contingencies, including those risks discussed in
Exhibit 99.1 hereto, the Company's actual results could differ materially from
those discussed above. Forward-looking statements speak only as of the date on
which such statement is made. The Company undertakes no obligation and does not
intend to update, revise or otherwise publicly release the result of any
revisions to these forward-looking statements that may be made to reflect
future events or circumstances.
-20-
<PAGE> 21
\
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
<S> <C>
Report of Independent Accountants................................................................. 22
Balance Sheets at December 28, 1997 and December 29, 1996......................................... 23
Statements of Income for the three years ended December 28, 1997.................................. 24
Statements of Cash Flows for the three years ended December 28, 1997.............................. 25
Statements of Stockholders' Equity for the three years ended December 28, 1997.................... 26
Notes to Financial Statements..................................................................... 27
FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts, for the three years ended
December 28, 1997................................................................................. 50
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
-21-
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Chief Auto Parts Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Chief Auto
Parts Inc. at December 28, 1997 and December 29, 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 28, 1997, 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
February 28, 1998
-22-
<PAGE> 23
CHIEF AUTO PARTS INC.
BALANCE SHEETS -- DECEMBER 28, 1997 AND DECEMBER 29, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,176 $ 1,140
Accounts receivable, trade 2,423 1,529
Accounts receivable, other, less allowances of $300 6,684 3,955
Income tax refund receivable 4,519 --
Merchandise inventories 148,181 140,418
Deferred income taxes 3,696 6,084
Prepaid and other 1,037 1,014
-------- --------
Total current assets 167,716 154,140
PROPERTY AND EQUIPMENT, at cost 124,080 109,728
Less accumulated depreciation and amortization 33,145 22,018
-------- --------
Net property and equipment 90,935 87,710
GOODWILL, less accumulated amortization of $4,694 and $3,574 40,886 42,006
DEFERRED INCOME TAXES 8,952 13,018
OTHER ASSETS 6,246 1,474
-------- --------
TOTAL $314,735 $298,348
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 675 $ 622
Current portion of obligations under capital leases 1,293 1,318
Trade accounts payable 69,955 71,928
Accrued salaries, benefits and related taxes 9,686 11,180
Accrued taxes (excluding payroll) 3,979 5,146
Other accrued liabilities 11,329 15,959
-------- --------
Total current liabilities 96,917 106,153
LONG-TERM DEBT, less current portion 174,194 62,400
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 15,693 17,646
OTHER NONCURRENT LIABILITIES 20,733 40,669
COMMITMENTS AND CONTINGENCIES
Common stock, $.01 par, 100,000 shares authorized, shares
issued and outstanding: 1997: 54,738; 1996: 49,898 1 1
Additional paid-in capital 5,858 70,815
Less management notes receivable (835) (1,821)
Retained earnings 2,174 2,485
-------- --------
Total stockholders' equity 7,198 71,480
-------- --------
TOTAL $314,735 $298,348
======== ========
</TABLE>
See notes to financial statements
-23-
<PAGE> 24
CHIEF AUTO PARTS INC.
STATEMENTS OF INCOME -- THREE YEARS ENDED DECEMBER 28, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $464,665 $438,182 $429,047
Cost of goods sold, warehousing and distribution 270,150 251,764 251,628
-------- -------- --------
Gross profit 194,515 186,418 177,419
Selling, general and administrative 160,086 167,064 145,829
Depreciation and amortization 14,259 11,622 10,397
-------- -------- --------
Operating income 20,170 7,732 21,193
Interest expense, net 15,357 6,203 6,009
Other expense, net 18 66 205
-------- -------- --------
Income before income taxes 4,795 1,463 14,979
Income tax expense 1,935 359 5,500
-------- -------- --------
Net income $ 2,860 $ 1,104 $ 9,479
======== ======== ========
</TABLE>
See notes to financial statements
-24-
<PAGE> 25
CHIEF AUTO PARTS INC.
STATEMENTS OF CASH FLOWS -- THREE YEARS ENDED DECEMBER 28, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,860 $ 1,104 $ 9,479
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 14,259 11,622 10,397
Amortization of deferred financing costs 717 319 266
Deferred compensation 79 1,558 1,558
Provision for store closures and legal reserves (1,250) 14,000 --
Loss on sale of assets 35 95 258
Provision for deferred income taxes 6,454 (1,352) 1,500
Increase (decrease) from changes in:
Accounts receivable (8,142) (406) (860)
Merchandise inventories (7,763) (32,785) (17,565)
Prepaid and other (23) (305) 745
Other assets 165 (30) (101)
Accounts payable (1,973) 16,232 5,879
Accrued salaries, benefits and related taxes (1,494) (749) (1,661)
Accrued taxes (1,167) (138) (1,458)
Other accrued liabilities (4,630) (2,956) 2,770
Other noncurrent liabilities (18,455) (4,345) (2,118)
-------- -------- --------
Net cash (used) provided by operating activities (20,328) 1,864 9,089
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 454 870 149
Additions to property and equipment (17,009) (23,275) (11,822)
-------- -------- --------
Net cash used by investing activities (16,555) (22,405) (11,673)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Senior Notes, net 126,200 -- --
Initial funding of new revolving credit loan 14,735 -- --
Borrowings under new revolving credit loan 71,938 -- --
Payments under new revolving credit loan (43,205) -- --
Borrowings under retired revolving credit loan 37,700 98,500 67,700
Payments under retired revolving credit loan (98,700) (76,000) (63,700)
Proceeds from exercise of stock options 6,872 -- --
Issuance of stock, net of notes receivable -- -- 47
Payments on management notes receivable for common stock 986 101 103
Distribution to stockholders (75,000) -- --
Deferred financing costs (2,683) (372) --
Principal payments on long-term debt (621) (572) (532)
Principal payments on obligations under capital leases (1,303) (1,178) (965)
-------- -------- --------
Net cash provided by financing activities 36,919 20,479 2,653
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 36 (62) 69
CASH AND EQUIVALENTS, beginning of period 1,140 1,202 1,133
-------- -------- --------
CASH AND EQUIVALENTS, end of period $ 1,176 $ 1,140 $ 1,202
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 12,286 $ 5,819 $ 6,199
======== ======== ========
Income taxes paid $ 920 $ 1,700 $ 3,688
======== ======== ========
</TABLE>
See notes to financial statements
-25-
<PAGE> 26
CHIEF AUTO PARTS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY -- THREE YEARS ENDED DECEMBER 28, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
--------------------- NOTES PAID-IN EARNINGS
SHARES AMOUNT RECEIVABLE CAPITAL (DEFICIT) TOTAL
------ ------ ---------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options 4,840 6,872 6,872
Payments on notes receivable 986 986
Distribution to stockholders (71,829) (3,171) (75,000)
Net income 2,860 2,860
-------- -- ------- -------- ------- --------
Balance, December 28, 1997 54,738 $1 $ (835) $ 5,858 $ 2,174 $ 7,198
======== == ======= ======== ======= ========
</TABLE>
See notes to financial statements
-26-
<PAGE> 27
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 552 stores (located predominately in
California and Texas) at December 28, 1997. At December 28, 1997, 86.2% 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 primarily by current members of Chief management and a member of
the Company's Board of Directors.
Public Reporting Status -- On March 27, 1997, the Company filed a Form S-1
Registration Statement with the Securities and Exchange Commission under the
Securities Act of 1933. The registration statement, which became effective on
May 23, 1997, pertained to a public offering of debt securities by the Company.
As a result of filing the registration statement, the Company is required to
file periodic reports with the SEC pursuant to Section 15(d) of the Securities
Exchange Act of 1934. Prior to the effective date of the registration statement,
the Company had no public reporting obligations.
Fiscal Year -- The Company's fiscal year is the 52- or 53-week period ending on
the last Sunday in December. Fiscal 1997 ended on December 28, 1997 (52 weeks)
("1997"), fiscal 1996 ended on December 29, 1996 (52 weeks) ("1996"), and fiscal
1995 ended on December 31, 1995 (53 weeks) ("1995").
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. The
Company periodically reviews the net realizability of its long-lived assets
through an assessment of the estimated future cash flows related to such assets.
In the event that assets are found to be carried at amounts which are in excess
of estimated gross future cash flows, then the assets will be adjusted for
impairment to a level commensurate with a discounted cash flow analysis of the
underlying assets.
Goodwill -- Goodwill is being amortized on the straight-line method over 40
years. Amortization for 1997, 1996, and 1995 was $1,120,000, $1,430,000, and
$1,430,000, respectively. 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 28, 1997.
Advertising Costs -- Advertising costs are expensed the first time the
advertising takes place. For 1997, 1996, and 1995, advertising expense, net of
reimbursements by vendors, was $1,830,000, $3,842,000 and $2,771,000,
respectively.
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.
-27-
<PAGE> 28
Chief Auto Parts Inc.
Notes to Financial Statements, cont.
Earnings per Share -- Earnings per share have not been presented, as the
information is not considered meaningful. The Company has no publicly traded
shares of common stock.
Stock Options -- During 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") for disclosure purposes only. 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 8, 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
application of SFAS 123 has no effect on the Company's financial position or
results of operations.
Concentrations of Credit Risk -- Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of accounts
receivable (trade and other). Concentrations of credit risk with respect to
accounts receivable are limited due to the large number of customers. The
Company's historical experience in collection of accounts receivable falls
within the recorded allowances, and no additional credit risk beyond such
allowances is believed inherent in the Company's accounts receivable.
New Accounting Pronouncements -- During 1997, the Company adopted Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure," which had no effect on the Company's financial position or results
of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
In February 1998, the Board issued No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." Chief will adopt these statements
in 1998. As these statements only require additional disclosures in the
Company's financial statements, their adoption will not have any effect on the
Company's financial position or results of operations.
Estimates -- 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.
2. PUBLIC DEBT OFFERING & RECAPITALIZATION
On May 28, 1997, the Company completed a public offering of the Senior Notes,
which together with a series of related transactions resulted in the
recapitalization of the Company. The primary components of the Recapitalization
were as follows:
o The Company issued the Senior Notes, from which the net proceeds were
$126,200,000. Additionally, the Company received $6,872,000 from the
exercise of stock options, and $908,000 from payments on management
notes receivable. The Company also made its initial borrowing under
the $100 million Revolving Credit Loan.
o A distribution of $75,000,000 was made to stockholders, and the
$80 million Revolving Credit Loan was repaid in full ($65,000,000).
In addition, the Company paid $3,995,000 of accrued employee
incentive compensation, and incurred $6,483,000 of deferred
financing costs.
-28-
<PAGE> 29
Chief Auto Parts Inc.
Notes to Financial Statements, cont.
The Senior Notes, which were registered under the Securities Act of 1933 through
the filing of Form S-1, are discussed more fully at Note 4, as is the $100
million Revolving Credit Loan.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 28, 1997 and
December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 11,179 $ 11,935
Buildings 13,778 14,037
Leasehold improvements 19,960 15,194
Furniture and equipment 55,540 43,905
Assets under capital leases 20,535 21,356
Equipment and construction in process 3,088 3,301
-------- --------
Property and equipment, at cost $124,080 $109,728
======== ========
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following at December 28, 1997 and December 29,
1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
10.5% Senior Notes, due May 2005 $130,000 $ --
$100 million Revolving Credit Loan, due May 2002 43,468 --
$7.7 million industrial development bonds, interest at
the higher of 8% or 75% of prime (8% at
December 28, 1997), due through December 1999 1,401 2,022
$80 million Revolving Credit Loan, retired May 1997 -- 61,000
-------- --------
Total 174,869 63,022
Less current portion 675 622
-------- --------
Long-term debt $174,194 $ 62,400
======== ========
</TABLE>
The Senior Notes are unsecured, and are effectively subordinated to the
Company's secured indebtedness. Interest on the Senior Notes is payable on May
15 and November 15 of each year, commencing November 15, 1997. The Senior Notes
are not redeemable prior to May 15, 2001, except that until May 15, 2000, the
Company may redeem up to an aggregate of 36% of the principal amount of the
Senior Notes at 110.5% of the principal amount plus accrued interest to the date
of redemption with the net proceeds of one or more Public Equity Offerings (as
defined) if at least 64% of the original aggregate principal amount of the
Senior Notes remains outstanding after each such redemption. On or after May 15,
2001, the Senior Notes are redeemable at the option of the Company, in whole or
in part, at redemption prices ranging from 105.25% in 2001 to 100.00% in 2003,
plus accrued interest to the date of redemption. If a change of control (as
defined) occurs, the Company may be required to repurchase the Senior Notes at
101% plus accrued interest. The related indenture contains various covenants
that, among other things, provide for the maintenance of minimum cash flow
levels, and place restrictions on additional indebtedness, payment of dividends,
investments, certain asset dispositions, and mergers.
The $100 million Revolving Credit Loan is secured by Chief's merchandise
inventory. Borrowings under this facility are available subject to a borrowing
base formula and are reduced by letter of credit usage. At December 28, 1997,
$41,131,000 was available for borrowing, excluding $43,468,000 outstanding at
such date, and a $278,000 letter of
-29-
<PAGE> 30
Chief Auto Parts Inc.
Notes to Financial Statements, cont.
credit. A commitment fee of 0.375% is payable on the unused portion. The
commitment term of this facility expires in May 2002. At the Company's option,
interest on the $100 million Revolving Credit Loan is payable monthly, quarterly
or on the last day of defined interest periods, based on either (a) the higher
of prime or the federal funds rate plus 0.5% (plus, in either case, a defined
margin rate ranging up to 1%), or (b) the London Interbank Offered Rate
("LIBOR") plus a defined margin rate ranging from 1.5% to 2.5%. The weighted
average interest rate in effect at December 28, 1997 was 8.17%. Covenants
contained in the $100 million Revolving Credit Loan are similar to those
described above for the Senior Notes.
The Company is in compliance with the covenants contained in the Senior Notes
indenture and the $100 million Revolving Credit Loan at December 28, 1997.
Deferred financing costs are amortized over the life of each commitment.
Amortization is included as interest expense in the accompanying statement of
income. Deferred financing costs, net of accumulated amortization, were
$5,923,000 and $985,000, at December 28, 1997 and December 29, 1996,
respectively.
The aggregate maturities of long-term debt for the years subsequent to December
28, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year:
1998 $ 675
1999 726
2000 --
2001 --
2002 43,468
Thereafter 130,000
--------
Total payments $174,869
========
</TABLE>
5. PROVISION FOR STORE CLOSURES
During 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 was based on the Company's best
estimate of the costs associated with closing the stores, and was comprised
primarily of the anticipated lease obligations for these stores, and losses on
the disposal of store-related assets. During 1997, the Company negotiated
favorable lease terminations related to several closed stores, and recorded a
credit to expense as a result.
6. 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.
-30-
<PAGE> 31
Chief Auto Parts Inc.
Notes to Financial Statements, cont.
Future minimum lease payments under capital and operating leases at December 28,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
<S> <C> <C>
Fiscal Year:
1998 $ 2,610 $ 34,428
1999 2,566 32,379
2000 2,613 29,444
2001 2,534 26,404
2002 2,467 24,531
Thereafter 13,578 81,146
------- --------
Total minimum lease payments 26,368 $228,332
========
Less imputed interest 9,382
-------
Present value of lease payments 16,986
Current portion 1,293
-------
Long-term portion $15,693
=======
</TABLE>
Rent expense under operating leases for 1997, 1996, and 1995 was $32,522,000,
$28,395,000, and $24,826,000, respectively. Contingent rentals were not
significant. Assets under capital leases consist of the following at December
28, 1997 and December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Buildings $20,142 $20,963
Furniture and equipment 393 393
------- -------
Total 20,535 21,356
Less accumulated amortization 6,596 4,945
------- -------
Net $13,939 $16,411
======= =======
</TABLE>
7. INCOME TAXES
Components of income tax expense for 1997, 1996, and 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $(4,519) $ 1,261 $2,950
State -- 450 1,050
Deferred:
Federal 6,454 (1,352) 1,500
------- ------- ------
Total $ 1,935 $ 359 $5,500
======= ======= ======
</TABLE>
-31-
<PAGE> 32
Chief Auto Parts Inc.
Notes to Financial Statements, cont.
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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal rate $1,630 $ 497 $ 5,093
State income taxes, net of U.S. federal benefit -- 297 693
Goodwill amortization 381 486 486
Benefit of previously unrecognized tax assets -- (834) (1,144)
Other, net (76) (87) 372
------ ----- -------
Total $1,935 $ 359 $ 5,500
====== ===== =======
</TABLE>
The major deferred tax asset (liability) items at December 28, 1997 and December
29, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accruals not deducted for tax purposes $ 8,217 $ 15,845
Tax loss carryforwards 4,246 --
Provisions for merchandise realignment,
store closures and related dispositions 3,797 6,697
Tax credit carryforwards 3,141 1,762
Inventory cost capitalization 1,990 1,956
Capital leases 1,219 995
Deferred gains from sale leasebacks 936 1,021
Unfavorable lease obligations 867 908
Other (1,341) 342
-------- --------
Net before valuation allowance 23,072 29,526
Valuation allowance (10,424) (10,424)
-------- --------
Net deferred tax assets $ 12,648 $ 19,102
======== ========
</TABLE>
At December 28, 1997, the Company had gross deferred tax assets of $24,632,000,
and gross deferred tax liabilities of $1,560,000. 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 was more likely than not that a portion of the
deferred tax assets would be used to offset future tax. Accordingly, the Company
reduced the valuation allowance by $10,000,000 during 1996, with a reduction in
goodwill to reflect deferred tax assets acquired in the Merger. A substantial
portion of the valuation allowance at December 28, 1997 relates to assets which
were acquired in the Merger.
The Company has net operating loss carryforwards of approximately $10,700,000,
which will expire in 2012. Additionally, the Company has an alternative minimum
tax credit carryforward of $2,001,000 which has no expiration, and general
business credit carryforwards of $1,140,000, which will begin to expire in 2004.
The Company has recorded an income tax receivable of $4,519,000 for the
anticipated refund from the current use of net operating losses.
8. 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. In conjunction
with the Recapitalization, the payment terms were revised, such that 50% of the
principal amount outstanding at the date of the Recapitalization was repaid to
the Company.
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<PAGE> 33
Chief Auto Parts Inc.
Notes to Financial Statements, cont.
Options -- In accordance with the Chief Auto Parts Inc. 1994 Executive Option
Plan (the "1994 Option Plan"), options to purchase 5,488 shares of common stock
can be granted to certain employees and directors. The exercise price of the
options was set at $1,420 per share, but was reduced to $49.55 per share by the
Board of Directors in December 1997. The option exercise price was reduced by
the per share amount of the distribution that the Company's stockholders
received in the Recapitalization. The options become exercisable (vest) in 25%
increments and may be exercised at any time after becoming exercisable until the
options expire. The 1994 Option Plan will terminate on June 30, 2004. In
conjunction with the Recapitalization, the vesting schedule was accelerated,
such that all outstanding options became exercisable at the date of the
Recapitalization, and all such options held by employees were exercised at that
time at $1,420 per share. At December 28, 1997, options to purchase 444 shares
of common stock at $49.55 per share were outstanding under this plan.
In connection with the Recapitalization, the Company adopted the Chief Auto
Parts Inc. 1997 Employee Option Plan (the "1997 Option Plan"). Under this plan,
options to purchase 1,400 shares of common stock can be granted to certain
employees, at an exercise price to be set at the time of grant. The options
become exercisable (vest) in 25% increments, and may be exercised at any time
after becoming exercisable until the options expire. The 1997 Option Plan will
terminate on May 31, 2007. As of December 28, 1997, no options had been granted
under this plan.
A summary of option activity for 1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 5,284 5,284 4,984
Granted -- -- 300
Exercised (4,840) -- --
Forfeited -- -- --
------ ------ ------
Outstanding at end of year 444 5,284 5,284
====== ====== ======
Exercisable at end of year 444 2,567 1,246
====== ====== ======
</TABLE>
The Company accounts for the 1994 Option Plan and the 1997 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 was 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 1997, 1996, and 1995 was insignificant.
Distribution to Stockholders -- In conjunction with the Recapitalization, a
distribution of $75,000,000 was made to the stockholders. The distribution
consisted primarily of a partial return of the stockholders' investment in
Chief, and accordingly, additional paid-in capital was reduced by $71,829,000.
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 28,
1997, 6,090 shares may be purchased under the warrants, at an exercise price of
$326 per share (as adjusted for the effect of the Recapitalization). 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.
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<PAGE> 34
Chief Auto Parts Inc.
Notes to Financial Statements, cont.
9. 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 1997, 1996, and 1995, Chief contributed approximately $310,000, $300,000
and $200,000, 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. During 1995, Chief 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"), key employees of the Company may earn bonuses if targeted
levels of income (as defined) are obtained by Chief. The original terms of the
Bonus Plan specified that accrued bonuses would be payable when a participant
exercises options to purchase shares of Chief's common stock. In conjunction
with the Recapitalization, $3,995,000 of such bonuses (accrued through and as of
December 29, 1996) were paid to participants in tandem with their exercise of
options to purchase Chief's common stock. Effective with the Recapitalization,
the Bonus Plan was amended such that future bonuses are payable annually. The
Bonus Plan will terminate on June 30, 2004. The deferred compensation expense
for this plan during 1997, 1996, and 1995 was $79,000, $1,558,000, and
$1,558,000, respectively.
10. 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. Non-cash investing and financing activities consisted of the
retirement of capital leases in 1997 and 1996 of $675,000 and $2,396,000,
respectively.
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<PAGE> 35
Chief Auto Parts Inc.
Notes to Financial Statements, cont.
11. COMMITMENTS AND CONTINGENCIES
On September 10, 1997, Chief settled two lawsuits in which it was a defendant.
The lawsuits were filed in September 1993 in the Superior Court of California,
County of Alameda by Stephen Cooper, who was later joined by an additional 242
current and former managers, and in March 1996 in the Superior Court of
California, County of San Joaquin by 15 current and former store managers. Both
lawsuits alleged that the Company failed to pay store managers and associate
store managers for overtime compensation as required by California law.
Under the terms of the settlement, the Company paid the plaintiffs and their
attorneys an aggregate amount of $9 million. The settlement payments were funded
from borrowings under the Company's $100 million Revolving Credit Loan. In light
of provisions for potential losses previously recorded by the Company, the
settlement had no adverse impact on the results of operations in 1997. In
agreeing to settle these lawsuits, the Company did not admit any liability or
wrongdoing.
At July 1997, there were approximately 700 store managers and associate store
managers previously or currently employed by the Company in California who had
not brought or joined in the suits against the Company. During July 1997, the
Company and approximately 400 current employees entered into release agreements
with respect to any overtime claims that such employees may have had against the
Company through the date of the release agreement.
The Company is a defendant in a class action entitled "Doug Winfrey, et. al. on
their own behalf and on behalf of a class and all others similarly situated, v.
Chief Auto Parts Inc., et. al.," filed in The Superior Court of California,
County of San Joaquin on August 22, 1995 and then transferred to The Superior
Court of California, County of San Francisco on October 26, 1995. The Superior
Court denied the plaintiffs' motion for class certification on December 7, 1996.
On February 6, 1998, the Court of Appeal reversed the Superior Court's order
denying class certification. No substantive proceedings regarding the merits of
this lawsuit have yet occurred.
The plaintiffs allege that the Company has a policy and practice of denying
hourly employees in California of mandated rest periods during their scheduled
hours of work. The plaintiffs are seeking damages, restitution, disgorgement of
profits, statutory penalties, declaratory relief, injunctive relief, prejudgment
interest, and reasonable attorneys fees, expenses and costs. Management is
unable to predict the outcome of this lawsuit at this time. The Company believes
that the potential damages recoverable by any single plaintiff are minimal.
However, if the plaintiff class were to prevail on all of their claims, the
amount of damages could be substantial. The Company is vigorously defending
against this action.
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 28, 1997 and
December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Store-closing provision $ 2,533 $ 2,065
Insurance reserves 1,828 2,382
Accrued interest 1,961 436
Other (including legal) 5,007 11,076
------- -------
Other accrued liabilities $11,329 $15,959
======= =======
</TABLE>
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<PAGE> 36
Chief Auto Parts Inc.
Notes to Financial Statements, cont.
13. OTHER NONCURRENT LIABILITIES
The following is a summary of other noncurrent liabilities at December 28, 1997
and December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued average rent $11,769 $12,394
Store-closing provision 3,986 10,384
Unfavorable lease obligations, net 1,628 3,434
Deferred compensation 759 4,675
Deferred income from sale-leasebacks 2,062 2,340
Other (including legal) 529 7,442
------- -------
Other noncurrent liabilities $20,733 $40,669
======= =======
</TABLE>
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<PAGE> 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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 Position
---- --- --------
<S> <C> <C>
David H. Eisenberg................ 61 President, Chief Executive Officer and Chairman of the Board
Thomas A. Hough................... 45 Senior Vice President -- Finance, Treasurer and Chief Financial Officer
William V. Pantuso................ 46 Senior Vice President -- Merchandising and Distribution
Larry L. Buresh................... 53 Vice President -- Information Systems
Kenneth D. Cason.................. 48 Vice President -- Advertising and Public Relations
Vicki Z. Demas.................... 57 Vice President -- Human Resources
Mary M. Mahon..................... 44 Vice President, General Counsel and Secretary
Harold S. Eastman................. 59 Director
Stephen A. Kaplan................. 39 Director
Richard Masson.................... 39 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.
Thomas A. Hough. Mr. Hough has served as Senior Vice President -- Finance,
Treasurer and Chief Financial Officer of the Company since August 1997. Mr.
Hough joined the Company in August 1993 as Vice President -- Finance, Treasurer
and Chief Financial Officer. 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.
William V. Pantuso. Mr. Pantuso has served as Senior Vice President --
Merchandising and Distribution of the Company since August 1997. Mr. Pantuso
joined the Company in March 1993 as Director of Inventory Management, was named
Director of Distribution and Inventory Management in October 1993, and was named
Vice President -- Merchandising and Distribution in April 1994. Prior to joining
the Company, Mr. Pantuso spent 20 years
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<PAGE> 38
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.
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.
Kenneth D. Cason. Mr. Cason has served as Vice President -- Advertising and
Public Affairs of the Company since August 1997. Mr. Cason has served in various
positions since he joined the Chief Auto Parts Division of The Southland
Corporation in June 1979, most recently serving as the Director of Advertising
and Public Relations.
Vicki Z. Demas. Ms. Demas has served as Vice President -- Human Resources of the
Company since August 1997. Ms. Demas joined the Company in June 1994 as Manager
of Employee Relations and was named Director of Human Resources in November
1994. Prior to joining the Company, Ms. Demas was a Personnel Director for the
Bloomingdale's Division of Federated Department Stores from January 1979 to
December 1993.
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.
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., Acorn Products, Inc., and GeoLogistics Corporation.
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. and as
a trustee of Peregrine Real Estate Trust.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation earned in 1997 and 1996 by the
Company's Chief Executive Officer and each of the other four most highly
compensated executive officers whose remuneration exceeded $100,000 (the "Named
Executive Officers"). The current compensation arrangements for each of these
officers are described in "Employment Arrangements" below.
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<PAGE> 39
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------------
Other Annual All Other
Name and Compensation Compen-
Principal Position Year Salary ($) Bonus ($) ($) (1) (2) sation ($) (3)
------------------ ---- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David H. Eisenberg 1997 440,000 555,589 (4) 19,200 131,038
President and Chief Executive Officer 1996 406,458 781,178 (4) 19,200 9,047
Thomas A. Hough 1997 190,250 160,899 (5) 10,200 42,693
Senior Vice President -- Finance, 1996 175,500 214,598 (5) 10,200 2,015
Treasurer and Chief Financial Officer
William V. Pantuso 1997 161,458 123,868 (6) 10,200 42,163
Senior Vice President -- 1996 143,500 150,237 (6) 10,200 1,471
Merchandising and Distribution
Larry L. Buresh 1997 155,667 106,591 (7) 5,100 1,848
Vice President -- Information Systems 1996 145,500 138,383 (7) -- 51,658 (8)
Mary M. Mahon 1997 152,292 116,787 (9) 10,200 42,525
Vice President, General Counsel 1996 145,531 169,573 (9) 10,200 1,855
and Secretary
</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 1997 or 1996 fiscal
years did not exceed the lesser of $50,000 or 10% of total salary and bonus
reported for such executive officer.
(3) Amount paid on behalf of such officer for a term life insurance policy. In
addition, for 1997, this amount includes $121,991 for Mr. Eisenberg and
$40,664 for Messrs. Hough and Pantuso and Ms. Mahon paid pursuant to that
certain Escrow Agreement dated June 27, 1994 among Chief Auto Parts Inc.,
General Electric Capital Corporation, and Bankers Trust Company.
(4) This amount includes $225,589 granted in 1997 and $451,178 earned in 1996
pursuant to the Chief Auto Parts Inc. 1994 Nonqualified Executive Target
Bonus Plan.
(5) This amount includes $70,899 granted in 1997 and $141,798 earned in 1996
pursuant to the Chief Auto Parts Inc. 1994 Nonqualified Executive Target
Bonus Plan.
(6) This amount includes $45,118 granted in 1997 and $90,237 earned in 1996
pursuant to the Chief Auto Parts Inc. 1994 Nonqualified Executive Target
Bonus Plan.
(7) This amount includes $42,591 granted in 1997 and $85,183 earned in 1996
pursuant to the Chief Auto Parts Inc. 1994 Nonqualified Executive Target
Bonus Plan.
(8) 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.
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<PAGE> 40
(9) This amount includes $54,787 granted in 1997 and $109,573 earned in 1996
pursuant to the Chief Auto Parts Inc. 1994 Nonqualified Executive Target
Bonus Plan.
AGGREGATE OPTION EXERCISES IN 1997
The following table sets forth for the Named Executive Officers information with
respect to exercised options, in each case with respect to options to purchase
shares of the Company's Common Stock. All of the Named Executive Officers
exercised their options during 1997. See "Item 12. Security Ownership of Certain
Beneficial Owners and Management."
<TABLE>
<CAPTION>
Shares Acquired Value
Name on Exercise (#) Realized ($) (1)
---- --------------- ----------------
<S> <C> <C>
David H. Eisenberg 1,588.98 --
Thomas A. Hough 499.39 --
William V. Pantuso 317.80 --
Larry L. Buresh 300.00 --
Mary M. Mahon 385.90 --
</TABLE>
- --------------
(1) "Value Realized" is the difference between the fair market value of the
underlying shares on the exercise date and the exercise price of the
options. 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 exercised options for the purpose of these
calculations. The value of the exercised options is equal to the net per
share value of such Common Stock as of the date of exercise, May 28, 1997
($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, which as of the
exercise date was for the four fiscal quarters completed as of March 30,
1997, multiplied by a multiple of 5.0, (B) cash as of March 30, 1997 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 March 30, 1997. Adjusted EBITDA for purposes of this calculation for the
four fiscal quarters most recently completed as of March 30, 1997 was $31.2
million which would result in a pre-discount valuation of approximately
$1,523.99 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 $1,142.99 to $1,295.39 per share. As the option exercise price
is $1,419.71 and exceeds 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.
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. In December 1997, the Board of
Directors reduced the exercise price of the 443.91 stock options held by Mr.
Eastman from $1,419.71 per share to $49.55 per share. The option exercise price
was reduced by the per share amount of the distribution that the Company's
stockholders received in the Recapitalization.
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
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<PAGE> 41
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
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. Mr. Eisenberg will make annual
payments on his Promissory Notes equal to 15% of any cash bonus paid to him in
such year, excluding amounts paid pursuant to the Bonus Plan. 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 1997 and as of December
28, 1997 on Mr. Eisenberg's Promissory Notes was $638,838 and $288,921,
respectively.
EMPLOYMENT ARRANGEMENTS
Employment Contracts and Termination of Employment and Change-in-Control
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 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 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.
The Company has adopted the Chief Auto Parts Inc. Severance Plan in the Event of
a Change of Control. Pursuant to such plan, if certain employees, including
executive officers, are terminated or voluntarily terminate for good cause
following a change in control (as defined), such employees will receive certain
severance payments. Such plan currently provides severance benefits for David H.
Eisenberg, Larry L. Buresh, Kenneth D. Cason, Vicki Z. Demas, Thomas A. Hough,
Mary M. Mahon and William V. Pantuso in an amount equal to 12 months, 15 months,
12 months, 9 months, 15 months, 15 months and 15 months of base salary,
respectively.
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<PAGE> 42
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. See "Item 13.
Certain Relationships and Related 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
choose 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).
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
exercise price of the options was set at $1,419.71 per share, but was reduced to
$49.55 per share by the Board of Directors in December 1997. The option exercise
price was reduced by the per share amount of the distribution that the Company's
stockholders received in the Recapitalization. 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
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<PAGE> 43
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.
1997 Employee Option Plan
The Company adopted 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 1997 Option Plan is administered by the Compensation Committee
of the Board of Directors. 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 is 1,400 shares, subject to certain adjustments. The 1997
Option Plan provides 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 are terminated subject to the reissuance of such options
in accordance with the 1997 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). The 1997 Option Plan requires 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 terminates 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 Bonus Plan provides 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. Although the Company did not achieve its 1997 EBITDA
target, in order to reward the Bonus Plan participants for their efforts, the
Board of Directors determined to award one-half of the amounts that would have
been earned under the Bonus Plan had the Company achieved its 1997 target.
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<PAGE> 44
The amount awarded was approximately $750,000. If the Company attains the EBITDA
target for fiscal 1998, the estimated aggregate amount payable under the Bonus
Plan in 1999 would be $1.5 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 1997 or
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.
Change in Control Severance Plan
The Company adopted the Chief Auto Parts Inc. Severance Plan in the Event of a
Change of Control (the "Severance Plan") to retain employees and to reduce the
uncertainty and disruption that can be caused by a potential change in control.
The Severance Plan provides for payments to be made to specified Company
employees whose employment is terminated within twelve months of a change of
control (as defined in the Severance Plan). The amount of severance benefits is
determined by the employee's base salary, position and length of service. See
"Item 11. Executive Compensation -- Employment Arrangements -- Employment
Contracts and Termination of Employment and Change-in-Control Arrangements."
The Board of Directors has the power to amend, modify or terminate the Severance
Plan. If not previously terminated, the Severance Plan expires on January 1,
2002.
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<PAGE> 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock, as of the date hereof, 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 87.8
TAMCO (4) 45,605.30 84.8
Oaktree Capital Management LLC (5) 42,489.41 79.0
The Principal Fund 42,489.41 79.0
Trust Company of the West (6) 1,605.15 3.0
General Electric Capital Corporation (7) 5,689.50 9.6
David H. Eisenberg (8) 2,651.78 4.9
Thomas A. Hough (9) 819.74 1.5
William V. Pantuso (10) 511.70 *
Larry L. Buresh 400.00 *
Kenneth D. Cason (11) 310.34 *
Vicki Z. Demas -- *
Mary M. Mahon (12) 626.48 1.2
Harold S. Eastman (13) 554.89 1.0
Stephen A. Kaplan (14) 42,489.41 79.0
Richard Masson (15) 47,210.45 87.8
All directors and executive officers as a group (10 persons) (16) 53,085.38 97.5
</TABLE>
- --------------
* 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, Cason, Hough and Pantuso
and Mlles. Demas and 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
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<PAGE> 46
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 warrants to purchase 125.3 shares of Common Stock.
(9) Includes warrants to purchase 25.7 shares of Common Stock.
(10 Includes warrants to purchase 6.4 shares of Common Stock.
(11) Includes warrants to purchase 21.6 shares of Common Stock.
(12) Includes warrants to purchase 12.9 shares of Common Stock.
(13) Includes options to purchase 443.91 shares of Common Stock.
(14) 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.
(15) 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.
(16) See Notes (8)-(15).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 1997 on the Promissory Notes
for David H. Eisenberg, Larry L. Buresh, Kenneth D. Cason, Thomas A. Hough, Mary
M. Mahon and William V. Pantuso was $638,838, $88,347, $72,272, $230,292,
$173,185 and $143,364, respectively. As of December 28, 1997, the aggregate
principal amount outstanding on the Promissory Notes for Messrs. Eisenberg,
Buresh, Cason and Hough, Ms. Mahon and Mr. Pantuso was $288,921, $44,174,
$33,299, $104,980, $76,427 and $61,516 respectively.
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<PAGE> 47
In connection with the Recapitalization, each Promissor repaid 50% of the
principal amount outstanding at the date of the Recapitalization under his or
her respective Promissory Notes, which payments equaled $319,419, $44,174,
$36,136, $115,146, $86,593 and $71,682 for Messrs. Eisenberg, Buresh, Cason and
Hough, Ms. Mahon, and Mr. Pantuso, 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, Cason, Hough,
Pantuso and Ms. Mahon 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 payments made pursuant to the Bonus Plan. See "Item 11.
Executive Compensation -- Employment Arrangements -- Management Stock
Purchases."
In connection with the Recapitalization, the Company paid the bonuses accrued
through fiscal 1996 pursuant to the Bonus Plan. This resulted in the payment of
$3,995,000 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, Kenneth D. Cason, Thomas
A. Hough, Mary M. Mahon and William V. Pantuso received bonus payments of $1.4
million, $127,774, $154,692, $425,393, $328,720 and $270,710, respectively. See
"Item 11. Executive Compensation -- Employment Arrangements -- Executive Target
Bonus Plan."
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> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
Financial Statements:
Report of Independent Accountants -- Price Waterhouse LLP
Balance Sheets at December 28, 1997 and December 29, 1996
Statements of Income for the three years ended December 28, 1997
Statements of Cash Flows for the three years ended December 28, 1997
Statements of Stockholders' Equity for the three years ended
December 28, 1997
Notes to Financial Statements
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts, for the three years
ended December 28, 1997
All other schedules are omitted because they are not applicable.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 28,
1997.
(c) Exhibits:
3.1 Fourth Restated Certificate of Incorporation of Chief Auto
Parts Inc. Incorporated by reference to Exhibit 3.1 to
Pre-Effective Amendment No. 5 to the Form S-1 Registration
Statement filed by the Company under the Securities Act (No.
333-24029).
3.2 Bylaws of Chief Auto Parts Inc. Incorporated by reference to
Exhibit 3.2 to the Form S-1 Registration Statement filed by
the Company under the Securities Act (No. 333-24029).
4.1 Form of Indenture between Chief Auto Parts Inc. and First
Trust National Association, as trustee. Incorporated by
reference to Exhibit 4.1 to Pre-Effective Amendment No. 5 to
the Form S-1 Registration Statement filed by the Company under
the Securities Act (No. 333-24029).
10.1 Second Amendment to the Chief Auto Parts Inc. 1994 Executive
Option Plan.
10.2 First Amendment to the Chief Auto Parts Inc. 1997 Employee
Option Plan.
10.3 Chief Auto Parts Inc. Severance Plan in the Event of Change of
Control.
10.4 Third Amendment to the Loan and Security Agreement Dated as of
May 28, 1997 among Chief Auto Parts Inc., as Borrower, The
Lenders Party Hereto and Heller Financial, Inc., as Agent.
10.5 Fourth Amendment to the Loan and Security Agreement Dated as
of May 28, 1997 among Chief Auto Parts Inc., as Borrower, The
Lenders Party Hereto and Heller Financial, Inc., as Agent.
10.6 1994 Executive Target Bonus Plan, as amended. Incorporated by
reference to Exhibit 10.1 to Pre-Effective Amendment No. 1 to
the Form S-1 Registration Statement filed by the Company under
the Securities Act (No. 333-24029).
10.7 1994 Executive Option Plan of Chief Auto Parts Inc., as
amended. Incorporated by reference to Exhibit 10.7 to
Pre-Effective Amendment No. 1 to the Form S-1 Registration
Statement filed by the Company under the Securities Act (No.
333-24029).
10.8 Form of 1997 Employee Option Plan of Chief Auto Parts Inc.
Incorporated by reference to Exhibit 10.8 to Pre-Effective
Amendment No. 2 to the Form S-1 Registration Statement filed
by the Company under the Securities Act (No. 333-24029).
10.9 Form of New Credit Facility. Incorporated by reference to
Exhibit 10.10 to Pre-Effective Amendment No. 5 to the Form S-1
Registration Statement filed by the Company under the
Securities Act (No. 333-24029).
10.10 Amendment to Stock Pledge Agreement. Incorporated by
reference to Exhibit 10.7 to the Company's Form 10-Q for the
quarter ended June 29, 1997.
12.1 Statement regarding computation of ratio of earnings to fixed
charges.
21.1 Subsidiaries of Chief Auto Parts Inc. Incorporated by
reference to Exhibit 21.1 to the Form S-1 Registration
Statement filed by the Company under the Securities Act (No.
333-24029).
24.1 Powers of Attorney.
27.1 Financial Data Schedule (electronic filing only).
99.1 Certain Risk Factors.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The Company's annual report will be furnished to security holders subsequent to
the filing of this Form 10-K. At such time, the annual report will also be
furnished to the Commission, in the form of Supplemental Information.
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<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CHIEF AUTO PARTS INC.
Date: March 27, 1998 /s/ David H. Eisenberg
-------------------------------------
David H. Eisenberg
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated.
Date: March 27, 1998 /s/ David H. Eisenberg
-------------------------------------
David H. Eisenberg
President, Chief Executive Officer
and Chairman of the Board
Date: March 27, 1998 /s/ Thomas A. Hough
-------------------------------------
Thomas A. Hough
Senior Vice President - Finance,
Treasurer, and Chief Financial Officer
(Principal Financial Officer)
Date: March 27, 1998 /s/ Patrick J. Corbett
-------------------------------------
Patrick J. Corbett
Director of Financial Reporting
(Principal Accounting Officer)
Date: March 27, 1998 *
-------------------------------------
Harold S. Eastman, Director
Date: March 27, 1998 *
-------------------------------------
Stephen A. Kaplan, Director
Date: March 27, 1998 *
-------------------------------------
Richard Masson, Director
* By: /s/ Thomas A. Hough
-------------------------------------
Thomas A. Hough
Attorney-in-Fact
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<PAGE> 50
SCHEDULE II
CHIEF AUTO PARTS INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 28, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT END
DESCRIPTION OF YEAR INCOME RESERVES (a) OF YEAR
----------- ------- ------ ------------ -------
<S> <C> <C> <C> <C>
Year Ended December 28, 1997:
Inventory Reserve $ 3,849 $ -- $ 1,876 $ 1,973
Store Closing Reserve 12,449 (1,250) 4,680 6,519
Year Ended December 29, 1996:
Inventory Reserve 4,433 506 1,090 3,849
Store Closing Reserve 7,268 7,000 1,819 12,449
Year Ended December 31, 1995:
Inventory Reserve 4,684 506 757 4,433
Store Closing Reserve 8,541 500 1,773 7,268
</TABLE>
- --------------
(a) Comprised of disposal of inventory, closed store assets and lease payments.
<PAGE> 51
CHIEF AUTO PARTS INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Fourth Restated Certificate of Incorporation of Chief Auto Parts
Inc. Incorporated by reference to Exhibit 3.1 to Pre-Effective
Amendment No. 5 to the Form S-1 Registration Statement filed by
the Company under the Securities Act (No. 333-24029).
3.2 Bylaws of Chief Auto Parts Inc. Incorporated by reference to
Exhibit 3.2 to the Form S-1 Registration Statement filed by the
Company under the Securities Act (No. 333-24029).
4.1 Form of Indenture between Chief Auto Parts Inc. and First Trust
National Association, as trustee. Incorporated by reference to
Exhibit 4.1 to Pre-Effective Amendment No. 5 to the Form S-1
Registration Statement filed by the Company under the Securities
Act (No. 333-24029).
10.1 Second Amendment to the Chief Auto Parts Inc. 1994 Executive
Option Plan.
10.2 First Amendment to the Chief Auto Parts Inc. 1997 Employee Option
Plan.
10.3 Chief Auto Parts Inc. Severance Plan in the Event of Change of
Control.
10.4 Third Amendment to the Loan and Security Agreement Dated as of
May 28, 1997 among Chief Auto Parts Inc., as Borrower, The
Lenders Party Hereto and Heller Financial, Inc., as Agent.
10.5 Fourth Amendment to the Loan and Security Agreement Dated as of
May 28, 1997 among Chief Auto Parts Inc., as Borrower, The
Lenders Party Hereto and Heller Financial, Inc., as Agent.
10.6 1994 Executive Target Bonus Plan, as amended. Incorporated by
reference to Exhibit 10.1 to Pre-Effective Amendment No. 1 to the
Form S-1 Registration Statement filed by the Company under the
Securities Act (No. 333-24029).
10.7 1994 Executive Option Plan of Chief Auto Parts Inc., as amended.
Incorporated by reference to Exhibit 10.7 to Pre-Effective
Amendment No. 1 to the Form S-1 Registration Statement filed by
the Company under the Securities Act (No. 333-24029).
10.8 Form of 1997 Employee Option Plan of Chief Auto Parts Inc.
Incorporated by reference to Exhibit 10.8 to Pre-Effective
Amendment No. 2 to the Form S-1 Registration Statement filed by
the Company under the Securities Act (No. 333-24029).
10.9 Form of New Credit Facility. Incorporated by reference to
Exhibit 10.10 to Pre-Effective Amendment No. 5 to the Form S-1
Registration Statement filed by the Company under the Securities
Act (No. 333-24029).
10.10 Amendment to Stock Pledge Agreement. Incorporated by reference to
Exhibit 10.7 to the Company's Form 10-Q for the quarter ended
June 29, 1997.
12.1 Statement regarding computation of ratio of earnings to fixed
charges.
21.1 Subsidiaries of Chief Auto Parts Inc. Incorporated by reference
to Exhibit 21.1 to the Form S-1 Registration Statement filed by
the Company under the Securities Act (No. 333-24029).
24.1 Powers of Attorney.
27.1 Financial Data Schedule (electronic filing only).
99.1 Certain Risk Factors.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO THE
CHIEF AUTO PARTS INC.
1994 EXECUTIVE OPTION PLAN
This Second Amendment is hereby adopted, made, and entered into by
Chief Auto Parts Inc. (the "Company") in accordance with the terms and
provisions of the Chief Auto Parts Inc. 1994 Executive Option Plan (the "Plan").
Capitalized terms used herein and not otherwise defined herein have the same
meaning as used in the Plan.
1. The definition of "Current Option Price" in Section 1 of Exhibit A
Option Terms and Conditions of the Plan and the definition of "Option Exercise
Price" of each outstanding Option Certificate are hereby amended to delete
$1,419.71 from such definitions and insert $49.553785 in lieu thereof.
2. Except as expressly amended hereby, the Plan remains in full force
and effect.
IN WITNESS WHEREOF, the Company has caused this Second Amendment to be
executed by a duly authorized officer effective the 15th day of December, 1997.
CHIEF AUTO PARTS INC.
By:
---------------------------------
Its: President
<PAGE> 1
EXHIBIT 10.2
FIRST AMENDMENT TO
THE CHIEF AUTO PARTS INC.
1997 EMPLOYEE OPTION PLAN
THIS FIRST AMENDMENT is hereby made and entered into by Chief Auto
Parts Inc. (the "Company") in accordance with the terms and provisions of the
1997 Employee Option Plan. Capitalized terms used herein and not otherwise
defined shall have the same meaning as used in the Plan.
1. Section 2.12 of the Plan is hereby amended to read in its
entirety as follows:
"Current Option Price" shall mean the Fair Market Value of a share of
Common Stock on the date of grant, or such other value as reasonably
determined by the Compensation Committee in good faith, as adjusted
hereunder.
2. Section 4.1 of the Plan is hereby amended to increase the total
number of shares of Common Stock for which Options may be granted to 1,400.
3. Section 9.2 of the Plan is hereby amended to add the following
sentence:
Notwithstanding the foregoing, in the event of a merger in which the
Company is not the surviving corporation and the Outstanding shares of
the Common Stock of the Company shall be exchanged for cash, the Holder
shall be entitled to receive, in cash, the difference between the
Current Option Price and the cash amount paid for the Outstanding
Shares of the Common Stock of the Company.
4. All other provisions of the Plan shall remain in full force and
effect.
IN WITNESS WHEREOF, the Company has caused this First Amendment to be
duly executed by an authorized officer this _____ day of ____________, 1998.
CHIEF AUTO PARTS INC.
By:
--------------------------------------------
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.3
CHIEF AUTO PARTS INC. SEVERANCE PLAN
IN THE EVENT OF CHANGE OF CONTROL
PURPOSE: Chief Auto Parts Inc. (the "Company") recognizes that even the
possibility of a change of control and the uncertainty and disruption a change
of control may result in the departure or distraction of the Company's office
and support employees. Such distraction or departures would be to the Company's
detriment at a critical time.
Therefore, the Company and its Board of Directors considers it in the best
interest of Chief and its stockholders to provide the following severance
benefits for certain employees whose employment is terminated as a result of a
change in control.
The Company hereby adopts the Chief Auto Parts Inc. Severance Plan In Event
of Change of Control (the "Plan"), effective as of January 1, 1998, for the
benefit of certain Employees of the Company, on the terms and conditions
hereinafter stated.
The Plan, as a "severance pay arrangement" within the meaning of Section
3(2)(B)(i) of ERISA, is intended to be excepted from the definitions of
"employee pension benefit plan" and "pension plan" set forth under Section 3(2)
of ERISA, and is intended to meet the descriptive requirements of a plan
constituting a "severance pay plan" within the meaning of regulations published
by the Secretary of Labor at Title 29, Code of Federal Regulations, Section
2510.3-2(b).
SECTION 1. DEFINITIONS. As hereinafter used:
1.1 "Ancillary Benefits" means any of the benefits set forth in
Section 3 hereof to which Employees may be entitled upon the occurrence of a
Severance.
1.2 "Board" means the Board of Directors of the Company.
1.3 "Cause" means an Employee's poor work performance or misconduct,
more specifically, (i) an Employee's willful or continued failure to
substantially perform his or her duties with the Company or a Successor
Employer, or (ii) an Employee's willful engagement in conduct which is
demonstrably and materially injurious to the Company or Successor Employer,
monetarily or otherwise; provided, however, that no act, or failure to act, on
an Employee's part shall be deemed "willful" unless done, or omitted to be done,
by the Employee not in good faith and without reasonable belief that such action
or omission was in the best interest of the Company or Successor Employer.
1.4 "Change of Control" shall mean:
(a) 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,
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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;
(b) 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_%
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
(c) 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 of 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.
1.5 "Closing Date" means, as to any Employee, the date of the closing
of the sale of the Company whether in whole, or a Region or Regions thereof.
1.6 "Code" means the Internal Revenue Code of 1986, as it may be
amended from time to time.
1.7 "Company" means Chief Auto Parts Inc., or any successors thereto.
1.8 "Effective Period" means, as to any Employee, the period that
begins on his Closing Date and ends on the earlier of (i) the date which is
twelve (12) months from such Closing Date or (ii) the Expiration Date.
1.9 "Employee" means a person who is employed by the Company as a
regular full-time employee or a regular part-time employee with more than three
(3) months of Service in a position listed in Section 2.1, immediately prior to
the applicable Closing Date. Notwithstanding the foregoing, this Plan shall not
apply to any employee covered by a
2
<PAGE> 3
collective bargaining agreement, or to any store employee, any hourly paid
distribution center employee, distribution center supervisors, maintenance
employees, set-up crews, or employees of the PPW division of the Company.
1.10 "Employee's Region" means a subsidiary, division or other
distinct operating group as so designated by the Company, in which an Employee
is employed immediately prior to the Closing Date.
1.11 "ERISA" means the Employee Retirement Income Security Act
of 1974, as it may be amended from time to time.
1.12 "Expiration Date" means the date this Plan expires and
becomes null and void and of no further effect, which unless specifically
extended by the Board, shall be August 1, 2001.
1.13 "Good Reason" means circumstances where
(a) the Employee's position is or will be eliminated as a
result of a sale of the Employee's Region;
(b) in offering the Employee continued employment, (i) the
Employee is asked to transfer to another facility of the
Company or Successor Employer (other than the Company's
corporate office) which is outside the same general
metropolitan area from the Employee's then current place of
employment, (ii) the Employee is asked to accept a material
reduction in salary or (iii) the Employee is asked to accept
a material change in the Employee's title, duties or
responsibilities in the nature of a demotion (other than for
Cause); and
(c) the Employee elects not to accept the offer of continued
employment because of (b)(i), (b)(ii) and/or (b)(iii) above.
1.14 "Permitted Holders" means (i) The Principal Fund, Trust
Company of the West or any of their respective Affiliates and (ii) Oaktree
Capital Management LLC and its Affiliates, including any partnerships, separate
accounts, or other entities managed by Oaktree.
1.15 "Plan" means the Chief Auto Parts Inc. Severance Plan In
Event of Change of Control, as set forth herein, and as the same may be amended
from time to time.
1.16 "Plan Administrator" means the Vice President, Human
Resources of the Company or such other person as may be appointed by the Company
from time to time to administer the Plan and to determine benefit eligibility.
3
<PAGE> 4
1.17 "Salary" means, for a Salaried Employee, base annual salary
with the Company as of his Severance Date (or Closing Date, if earlier) and, for
an Employee paid on an hourly basis, the average monthly wages received by the
Employee from the Company during the twelve (12) month period immediately
preceding his Severance Date (or Closing Date, if earlier). "Salary" does not
include overtime, shift differential, bonus, or any other remuneration. A "Month
of Salary" and a "Week of Salary" shall be calculated in accordance with the
Company's regular payroll procedure.
1.18 "Service" means the Employee's period of employment with the
Company beginning with full time or regular part time employment, and ending on
the Employee's Severance Date (or Closing Date, if earlier), and determined in
accordance with Company Policies.
1.19 "Severance" means the involuntary termination of an
Employee's employment with the Company or a Successor Employer, which occurs as
a direct result of a sale of the Employee's Region and which involuntary
termination occurs during the Effective Period. An Employee will not be
considered to have incurred a Severance if (i) the Employee voluntarily
terminates his employment with the Company or Successor Employer, other than for
Good Reason, or the Employee's death or a physical or mental condition causes
the Employee's inability to substantially perform his duties (even with
reasonable accommodations) with the employer, including, without limitation,
such condition entitling him to benefits under any sick pay or disability income
policy or program of the Company or Successor Employer, or (ii) he is dismissed
for Cause, or (iii) the Employee's employment with the Successor Employer in the
same or similar position he held with the Company immediately prior to the sale
of the Employee's Region terminates for any reason, and the Successor Employer
maintains a Successor Plan. In no event shall an Employee be deemed to have
incurred a Severance merely because of the sale of the Employee's Region.
1.20 "Severance Date" means the date during the Effective Period
on which an Employee incurs a Severance.
1.21 "Severance Benefits" means payments made to eligible
Employees pursuant to Section 2.1 hereof.
1.22 "Successor Employer" means any entity which purchases a
subsidiary, division or region from the Company, closes such purchase on or
before the Expiration Date and offers continued employment to an Employee.
1.23 "Successor Plan" means a severance arrangement adopted by a
Successor Employer which provides substantially similar benefits to Employees as
the benefits provided under this Plan.
4
<PAGE> 5
SECTION 2. SEVERANCE BENEFITS UPON A CHANGE OF CONTROL.
2.1 Amount of Severance Benefits. Any Employee who incurs a Severance
shall be entitled to receive Severance Benefits in accordance with the
following, based upon his position with the Company at the Closing Date of the
Employee's Division; provided, however, that no Employee shall be eligible to
receive Severance Benefits or any Ancillary Benefits under this Plan to the
extent the Employee receives benefits of the same type from or under any
contract, plan, fund, program, policy or arrangement maintained by a Successor
Employer.
(a) Category A: The Severance Benefits in this Category A are
applicable only to an Employee who, immediately prior to the
Closing Date of the Employee's Region, was employed for at least
one (1) year by the Company in the positions of:
President and Chief Executive Officer: Twelve (12) months of
Salary;
Senior Vice President; Vice President and Chief Information
Officer; Vice President and General Counsel; Executive Assistant
to the President: Fifteen (15) months of Salary.
(b) Category B: The Severance Benefits in this Category are
applicable only to an Employee who, immediately prior to the
Closing Date of the Employee's Region, is employed by the Company
in any of the following positions:
Other Members of the Executive Operating Committee, as designated
from time to time by the President and Chief Executive Officer,
and other Corporate Officers:
Less than one (1) year: Six (6) months.
More than one (1) year: Four (4) weeks of Salary, multiplied
by the Employee's Service, with a minimum payment of nine
(9) months, and a maximum payment of twelve (12) months.
(c) Category C: The Severance Benefits in this Category C are
applicable only to an Employee who, immediately prior to the
Closing Date of the Employee's Region, is employed by the Company
as a Non-Store, Exempt (Salaried) employee such as Corporate
Department Managers, Managers, or Distribution Center Managers
(Grades 30 through 33):
(i) If such Employee has one (1) year of Service or less than
one (1) year of Service, the Severance Benefits shall be
equal to six (6) weeks of Salary;
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<PAGE> 6
(ii) If such an Employee has more than one (1) year of Service,
the Severance Benefits shall be three weeks of Salary
multiplied by the Employee's Service, not to exceed
twenty-six (26) weeks of Salary, with a minimum of six (6)
weeks of Salary.
(d) Category D: The Severance Benefits in this Category D are
applicable only to an Employee who, immediately prior to the
Closing Date of the Employee's Region, is employed by the Company
in Grades 23 through 29:
(i) If such an Employee has less than one (1) year of Service,
the Severance Benefits shall be equal to one (1) week of
Salary; and if more than one (1) year, but not more than two
(2) years, two (2) weeks of Salary;
(ii) If such an Employee has more than two (2) years of Service,
the Severance Benefits shall be equal to two (2) weeks of
Salary for the first two (2) years; thereafter one (1)
additional week for each year of Service, with a minimum of
four (4) weeks and a maximum of twenty (20) weeks.
(e) Category E: The Severance Benefits in this Category E are
applicable only to an Employee who, immediately prior to the
Closing Date of the Employee's Region, is employed by the Company
as an hourly-paid, non-union and non-store-assigned employee in
an administrative, clerical or support staff position.
(i) If such an Employee has less than one (1) year of Service
the Severance Benefits shall be equal to: one (1) week of
Salary.
(ii) If such an Employee has one (1) year of Service or more,
the Severance Benefits shall be one (1) week of Salary
multiplied by the Employee's Service, not to exceed eight
(8) weeks, with a minimum of two (2) weeks.
2.2 Form of Payment. At the Company's sole discretion, all Severance
Benefits shall be calculated and payable from the Severance Date and paid to
Employees on a biweekly basis, from which shall be deducted federal, state and
local withholding taxes, FICA and the Employee's required contributions for any
Ancillary Benefits. The Company may also choose to pay all Severance Benefits in
a lump sum, less applicable withholdings and employee contributions.
SECTION 3. ANCILLARY BENEFITS.
3.1 Unused Vacation. Any Employee who is eligible for and receives
Severance Benefits under this Plan shall be paid, in cash, for all earned but
unused vacation pay which has not been paid to the Employee as of the Employee's
Severance Date.
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<PAGE> 7
3.2 Health Care Benefits. Benefits under the Company's health care
plans, which provide medical, dental and prescription coverage, will be provided
during the period of time for which an Employee could receive periodic payment
of Severance Benefits; provided, however, that the Employee must make the same
contributions for such benefits that current, active employees are making during
such period.
3.3 Career Counseling. The Company in its discretion may provide
career counseling by a career counseling firm selected by and paid for by the
Company at a level of counseling selected by the Company.
3.4 Relocation. For those Employees holding positions listed in
Category A or B in Section 2.1 of the Plan who incur a Severance, the Company
shall absorb the reasonable cost of relocating the Employee to a point no
further than the point of origin from which the Employee was moved, if the
Employee's Severance Date is less than twelve (12) months after the Employee was
last relocated by the Company. Any relocation of an Employee under this Plan
shall be made in accordance with the Company's relocation policy and applicable
regulations of the Internal Revenue Service. If a new employer of any Employee
absorbs the costs of relocating the Employee, or if an Employee obtains
full-time employment in the general metropolitan area where he is located at the
time of his Severance, then, in either event, the provisions of this Section 3.4
shall not apply.
3.5 Stock Options. Any Employee holding options in the Company's
common stock at his Severance Date shall be entitled to receive a stock option
benefit as provided for in said option plan.
SECTION 4. CLAIMS PROCEDURES.
4.1 in the event of a claim by an Employee as to the entitlement to
or amount of any Severance Benefit or its method of payment, or as to the
entitlement to or amount of any Ancillary Benefit, or its method of payment, or
as to the entitlement to or amount of any Ancillary Benefit, or its method of
payment, such Employee shall present the reason for his claim in writing to the
Plan Administrator within thirty (30) days of his or her severance. The Plan
Administrator shall, within thirty (30) days after receipt of such written
claim, send a written notification to the Employee as to its disposition. In the
Event the claim is wholly or partially denied, such written notification shall
(a) state the specific reason or reasons for the denial, (b) make specific
reference to pertinent Plan Provisions on which the denial is based, (c) provide
a description of any additional material or information necessary for the
Employee to perfect the claim and an explanation of why such material or
information is necessary, and (d) set forth the procedure by which the Employee
may appeal the denial of his claim. In the event an Employee wishes to appeal
the denial of his claim, he may request a review of such denial by making
application in writing to the Plan Administrator within sixty (60) days after
receipt of such denial. Such Employee (or his duly authorized legal
representative) may, upon written request to the Plan Administrator, review any
documents pertinent to his claim, and submit in writing issues and comments in
support
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<PAGE> 8
of his position. Within sixty (60) days after receipt of a written appeal
(unless special circumstances, such as the need to hold a hearing, require an
extension of time, but in no event more than one hundred twenty (120) days after
such receipt), the Plan Administrator shall notify the Employee of the final
decision. The final decision shall be in writing and shall include specific
reasons for the decision, written in a manner calculated to be understood by the
claimant, and specific references to the pertinent Plan provisions on which the
decision is based.
4.2 No Employee shall be eligible to receive Severance Benefits or
other Ancillary Benefits under the Plan unless he first releases the Company in
writing from all claims or liabilities of any kind relating to his Severance.
The Company may waive this requirement in its sole discretion.
SECTION 5. PLAN ADMINISTRATION.
5.1 The Plan shall be interpreted, administered and operated by the
Plan Administrator, who shall have complete authority, in his sole discretion,
subject to the express provisions of the Plan, to determine who shall be
eligible for Severance Benefits and/or Ancillary Benefits, to interpret the
Plan, to prescribe, amend and rescind rules and regulations relating to it, and
to make all other determinations necessary or advisable for the administration
of the Plan.
5.2 All questions of any character whatsoever arising in connection
with the interpretation of the Plan or its administration or operation shall be
submitted to and settled and determined by the Plan Administrator in an
equitable and fair manner in accordance with the procedure for claims and
appeals described in Section 4.1. Any such settlement and determination shall be
final and conclusive, and shall bind and may be relied upon by the Company, each
of the Employees and all other parties in interest.
5.3 The Plan Administrator may delegate any of his duties hereunder
to such person or persons as he or she may designate from time to time.
5.4 The Plan Administrator is empowered, on behalf of the Plan, to
engage accountants, legal counsel and such other personnel as he deems necessary
or advisable to assist him in the performance of his duties under the Plan. The
functions of any such persons engaged by the Plan Administrator shall be limited
to the specified services and duties for which they are engaged, and such
persons shall have no other duties, obligations or responsibilities under the
Plan. Such persons shall exercise no discretionary authority or discretionary
control respecting the management of the Plan. All reasonable expenses thereof
shall be borne by the Company.
SECTION 6. PLAN MODIFICATION OR TERMINATION.
6.1 The Plan may be amended or terminated by the Board of Directors
at any time, and the Board may extend the applicability of the Plan to other
Employees or extend
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<PAGE> 9
the Effective Period. Additionally, the Board of Directors upon recommendation
of the President may, from time to time, make such modifications as the Board
Members deem appropriate.
SECTION 7. GENERAL PROVISIONS.
7.1 Nothing in the Plan shall be deemed to give any Employee the
right to be retained in the employ of the Company or a Successor Employer, or to
interfere with the right of the Company or a Successor Employer to discharge him
at any time and for any lawful reason, with or without notice.
7.2 Except as otherwise provided herein or by law, no right or
interest of any Employee under the Plan shall be assignable or transferable, in
whole or in part, either directly or by operation of law or otherwise, including
without limitation by execution, levy, garnishment, attachment, pledge or in any
manner; no attempted assignment or transfer thereof shall be effective; and no
right or interest of any Employee under the plan shall be liable for, or subject
to, any obligation or liability of such Employee. When a payment is due under
this Plan to an Employee who is unable to care for his affairs, payment may be
made directly to his legal guardian or personal representative.
7.3 No Severed Employee shall be entitled to receive Severance
Benefits under any other severance pay plan of the Company. The Employer shall
provide each Employee with at least thirty (30) days' notice of an Employee's
Severance Date, or such greater notice as required by law. Only the Plan
Administrator or his delegate, or an individual in a comparable position with a
Successor Employer, is authorized to notify an Employee of his Severance Date.
If the Company is obligated by law or by contract to pay severance pay, a
termination indemnity, notice pay, or the like, or if the Company is obligated
by law or by contract to provide advance notice of separation ("Notice Period"),
then any Severance Benefits hereunder shall be reduced by the amount of any such
severance pay, termination indemnity, notice pay or the like, as applicable, and
by the amount of any pay received during any Notice Period.
7.4 An Employee shall not be eligible for any benefits under the Plan
unless he remains in his position of employment with the Company or a Successor
Employer until his Severance Date.
7.5 Any Termination of an Employee for Cause shall be administered in
accordance with the Company's or Successor Employer's employment policies.
7.6 If any Employee dies while eligible to receive Severance
Benefits, the balance of any Severance Benefits due and owing shall be payable
to the Employee's estate.
7.7 In the event that any amount to be received by an Employee in
accordance with this policy would cause an "excess parachute payment" to exist
within the meaning of
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<PAGE> 10
Sections 280G or 4999 of the Code, the Company shall reduce the amount payable
to the Employee to a lesser amount so that no portion of any amount received by
the Employee would be an "excess parachute payment."
7.8 If any provision of the Plan shall be held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provisions hereof, and the Plan shall be construed and enforced as if such
provisions had not been included.
7.9 The Plan shall be governed by and construed in accordance with
ERISA and all applicable rules and regulations thereunder.
7.10 The Plan shall be effective as of January 1, 1998, and shall
remain in effect until the Expiration Date unless earlier terminated by the
Board pursuant to Section 6.1 hereof, and shall not be applicable to any
Severance which occurs after the Expiration Date.
7.11 This Plan shall constitute the entire Plan and shall supersede
any and all prior documents, instruments, agreements, policies, notices, or
descriptions related to the subject matter hereof.
IN WITNESS WHEREOF, the Company has caused the Plan to be adopted this
_____ day of ____________, 1998.
CHIEF AUTO PARTS INC.
By:
--------------------------------------
Title:
------------------------------------
10
<PAGE> 1
EXHIBIT 10.4
CHIEF AUTO PARTS INC.
November 6, 1997
To: The Lenders Party to the Loan and Security Agreement Referred to Below
Ladies and Gentlemen:
We refer to the Loan and Security Agreement, dated as of May 28, 1997,
among you, us and Heller Financial, Inc., as Agent (the "Loan Agreement").
Capitalized terms used, but not defined herein, shall have the respective
meanings set forth in the Loan Agreement.
Pursuant to Section 7.4(e) of the Loan Agreement, we and our Restricted
Subsidiaries are permitted to make investments in and loans and advances to
Subsidiaries that are not Restricted Subsidiaries ("Unrestricted Subsidiaries")
and Persons that are not Subsidiaries in an aggregate amount, net of all
returns of capital and other distributions, not exceeding $5,000,000 at any
time outstanding. We may desire that such investments in and loans and advances
to Unrestricted Subsidiaries be used by such Unrestricted Subsidiaries to
purchase from time to time capital stock of Persons, some of which capital
stock may constitute margin stock within the meaning of Regulation G or
Regulation U. Section 5.15 of the Loan Agreement prohibits any portion of the
proceeds of any Loan be used by us or any of our Subsidiaries for the purpose
of purchasing or carrying margin stock.
We hereby request your consent to the waiver of compliance with such
prohibition under Section 5.15 of the Loan Agreement solely with respect to the
use of proceeds of Loans by an Unrestricted Subsidiary for the purchase by such
Unrestricted Subsidiary of investments of capital stock that constitute margin
stock. By your signature below and subject to the conditions set forth in the
immediately succeeding sentence, you hereby consent to the waiver of compliance
with such prohibition under such section solely with respect to the use of
proceeds of Loans by an Unrestricted Subsidiary for the purchase by such
Unrestricted Subsidiary of investments of capital stock that constitute margin
stock. Such consent is subject to the following conditions: (i) the Agent shall
have received the written consent of all the Lenders, (ii) on the date hereof
and on the date of each such purchase of margin stock there shall exist no
Default or Event of Default, (iii) none of such purchases of capital stock or
the use of any proceeds of any Loans to purchase same shall violate any
applicable laws, statutes, rules or regulations, including, without limitation,
Regulation G, Regulation U and Regulation T, and, if requested by the Agent,
the Agent shall receive an opinion, in form and substance reasonably
satisfactory to the Agent, from counsel to us acceptable to the Agent to such
effect, (iv) none of
<PAGE> 2
such purchases shall be made pursuant to a tender offer that is opposed by the
Board of Directors of the issuer of such capital stock, (v) the aggregate amount
of all proceeds of Loans used or otherwise borrowed with respect to the purchase
of any margin stock shall not exceed $5,000,000 at any time outstanding, (vi) we
shall execute and deliver or cause to be executed and delivered to the Agent and
the Lenders such documents, agreements and instruments as is required by
applicable law or reasonably requested by the Agent with respect to any such
purchases or use of proceeds, (vii) no purchases of margin stock shall be
permitted after April 30, 1999, (viii) all proceeds of Loans for such purpose
shall be invested in and/or loaned or advanced to the Unrestricted Subsidiary by
the Borrower pursuant to and in accordance with Section 7.4(e) of the Loan
Agreement, (ix) all of the equity interests in the Unrestricted Subsidiary shall
have been pledged to the Agent pursuant to a pledge agreement in form and
substance reasonably satisfactory to the Agent and the Agent shall have acquired
a first priority perfected Lien in all such equity interests and (x) all
dividends, returns of equity and other distributions with respect to equity of
the Unrestricted Subsidiary and all repayments of all or any portion of loans
and advances made by the Borrower to the Unrestricted Subsidiary shall be used
to immediately repay the Obligations. By your signature below, you hereby agree
that any margin stock purchased by an Unrestricted Subsidiary under and in
accordance with the terms of this letter agreement shall not constitute
Collateral and you hereby authorize the Agent to execute and deliver any and all
documents in form and substance satisfactory to the Agent to evidence the
release of any Lien of the Agent therein.
Except as herein consented by you, the Loan Agreement is hereby ratified
and confirmed and shall remain in full force and effect in accordance with its
terms. We hereby represent that there exists no Default or Event of Default. We
agree that the within consent shall be effective only for the specific instances
and purposes specified herein.
CHIEF AUTO PARTS INC.
By: /s/ THOMAS A. HOUGH
----------------------
Name: Thomas A. Hough
Title: Senior Vice President & CFO
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<PAGE> 3
By its signature below, each of the undersigned hereby consents to the
waiver referred to above and agrees to the other agreements made by it above, in
each instance, subject to the terms and conditions set forth above:
HELLER FINANCIAL, INC.,
Individually and as Agent
By: /s/ RONALD S. LITTLE
-------------------------------
Name: Ronald S. Little
Title: Vice President
BANKBOSTON, N.A.
By: /s/ ROBERT S. ALLEN
-------------------------------
Name: Robert S. Allen
Title: Director
FLEET CAPITAL CORPORATION
By: /s/ THOMAS MARALE
-------------------------------
Name: Thomas Marale
Title: Vice President
WELLS FARGO BANK, N.A.
By: /s/ DANA D. CAGLE
-------------------------------
Name: Dana D. Cagle
Title: Vice President
3
<PAGE> 4
NATIONSBANK OF TEXAS, N.A.
By: /s/ E. JAMES BECKEMEIR
------------------------
Name: E. James Beckemeir
Title: Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ TIMOTHY S. CULVER
------------------------
Name: Timothy S. Culver
Title: AVP
THE CHASE MANHATTAN BANK
By: /s/ JEFFREY S. ACKERMAN
------------------------
Name: Jeffrey S. Ackerman
Title: Vice President
BANK ONE, TEXAS, N.A.
By: /s/ GINA NORRIS
------------------------
Name: Gina Norris
Title: Vice President
4
<PAGE> 1
EXHIBIT 10.5
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Fourth Amendment to that certain Loan and Security Agreement
("Amendment") is effective as of the 23rd day of December 1997 by and among
Chief Auto Parts Inc. ("BORROWER"), Wells Fargo Bank, N.A. ("Wells Fargo"), The
CIT Group/Business Credit, Inc. ("CIT"), The Chase Manhattan Bank ("Chase"),
Bank One, Texas, N.A. ("Bank One"), Fleet Capital Corporation ("Fleet"),
BankBoston, N.A. ("BankBoston"), NationsBank of Texas, N.A. ("NationsBank")
(Wells Fargo, CIT, Chase, Bank One, Fleet, BankBoston, and NationsBank each
individually a "LENDER" and collectively "LENDERS") and Heller Financial, Inc.,
for itself as a Lender and as Agent ("AGENT")
WHEREAS, Agent, Lenders and Borrowers are parties to a certain Loan and
Security Agreement, dated May 28, 1997 and all amendments thereto (the
"AGREEMENT"); and
WHEREAS, the parties desire to amend the Agreement as hereinafter set
forth;
NOW THEREFORE, in consideration of the mutual conditions and agreements
set forth in the Agreement and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto hereby agree as follows:
1. DEFINITIONS. Capitalized terms used in this Amendment, unless
otherwise defined herein, shall have the meaning ascribed to such term in the
Agreement.
2. AMENDMENT. Subject to the conditions set forth below, the Agreement
is amended as follows:
(A) Subsection 1.1 is amended by deleting the definition of "LIBOR"
in its entirety and replacing it with the following:
"LIBOR" means, for each Interest Period, a rate determined in
accordance with the following provisions:
(a) LIBOR will be the rate for deposits in U.S. dollars for the
relevant Interest Period commencing on the second London Banking Day
immediately following that Interest Determination Date, that appears on the
Telerate Page 3750 as of 11:00 a.m., London time, on that Interest
Determination Date ("LIBOR Telerate") "Telerate Page 3750" means the display
designated as page "3750" on the Telerate Services (or such other page as may
replace the 3750 page on that service or such other service or services as may
be nominated by the
<PAGE> 2
service or such other service or services as may be nominated by the British
Bankers' Association for the purpose of displaying London interbank offered
rates for U.S. dollar deposits). If no rate appears on the Telerate Page 3750,
LIBOR in respect of that Interest Determination Date will be determined as if
the parties had specified the rate described in (b) below.
(b) With respect to an Interest Determination Date on which no rate appears
on Telerate Page 3750, as specified in (a) above, LIBOR will be determined on
the basis of the rates at which deposits in U.S. dollars for the relevant
Interest Period are offered at approximately 11:00 a.m. London time, on that
Interest Determination Date by four major banks in the London interbank market
selected by Agent ("Reference Banks") to prime banks in the London interbank
market commencing on the second London Banking Day immediately following that
Interest Determination Date and in a principal amount equal to an amount of not
less than $1,000,000 that is representative for a single transaction in such
market at such time. Agent will request the principal London office of each of
the Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, LIBOR in respect of that Interest Determination Date
will be the arithmetic mean of such quotations. If fewer than two quotations are
provided, LIBOR in respect of that Interest Determination Date will be the
arithmetic mean of the rates quoted at approximately 11:00 a.m. New York City
time, on that Interest Determination Date by three major banks in the City of
New York selected by Agent for loans in U.S. dollars to leading European banks
for the relevant Interest Period commencing on the second London Banking Day
immediately following that Interest Determination Date and in a principal amount
equal to an amount of not less than $1,000,000 that is representative for a
single transaction in such market at such time; provided, however, that if the
banks selected as aforesaid by Agent are not quoting as mentioned in this
sentence, LIBOR with respect to such Interest Determination Date will be the
rate of LIBOR in effect on such date.
The rate determined by either (a) or (b) shall be divided by a number
equal to 1.0 minus the aggregate (but without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on the day
which is two (2) Business Days prior to the beginning of such Interest Period
(including, without limitation, basic, supplemental, marginal, special
emergency or other reserves under any regulations of the Board of Governors of
the Federal Reserve System or other governmental authority having jurisdiction
with respect thereto, as now and from time to time in effect) for Eurocurrency
funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of
such Board) which are required to be
2
<PAGE> 3
maintained by a member bank of the Federal Reserve System (such rate to be
adjusted to the nearest one sixteenth of one percent (1/16 of 1%) or, if
there is not a nearest one sixteenth of one percent (1/16 of 1%), to the
next higher one sixteenth of one percent (1/16 of 1%)).
(B) Subsection 1.1 is further amended by inserting, in proper
alphabetical order, the following definitions:
"London Banking Day" means any day on which dealings in deposits in
U.S. dollars are transacted in the London Interbank market.
"Interest Determination Date" for a LIBOR Loan will be the second
London Banking Day preceding the beginning of the next Interest Period
elected by Borrower.
(C) Subsection 2.2(B) is amended by deleting said subsection in its
entirety and replacing it with the following:
(B) Interest Periods. In connection with each LIBOR Loan, Borrower
shall elect an interest period (each an "Interest Period") to be applicable
to such Loan, which Interest Period shall be either a one, two, three, or
six month period; provided that:
(1) the initial Interest Period for any LIBOR Loan shall commence on
the Funding Date of such Loan;
(2) in the case of successive Interest Periods, each successive
Interest Period shall commence on the day on which the immediately
preceding Interest Period expires;
(3) if an Interest Period expiration date is not a Business Day, such
Interest Period shall expire on the next succeeding Business Day; provided
that if any Interest Period expiration date is not a Business Day but is a
day of the month after which no further Business Day occurs in such month,
such Interest Period shall expire on the immediately preceding Business
Day;
(4) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall,
subject to part (5) below, end on the last Business Day of a calendar
month;
(5) no Interest Period shall extend beyond the Termination Date;
3
<PAGE> 4
(6) no Interest Period may extend beyond a scheduled principal
payment date unless the sum of (a) the aggregate principal amount of Loans
that are Base Rate Loans or that have Interest Periods expiring on or
before such date and (b) the available, unused portion of the lesser of (i)
the Revolving Loan Commitment or (ii) the Borrowing Base equals or exceeds
the principal amount required to be paid on the Loans on such date; and
(7) there shall be no more than ten (10) Interest Periods relating
to LIBOR Loans outstanding at any time.
(D) Subsection 8.1(S) is amended by deleting said subsection in its
entirety and replacing it with the following:
(S) Blocked Account Agreements. Agent shall have failed to receive
within two hundred and seventy (270) days after the Closing Date blocked
account agreements substantially in the form annexed hereto as Exhibit 5.6
or otherwise reasonably acceptable to Agent duly executed by Borrower and
each of the banks set forth on Exhibit 8.1(S) annexed hereto with respect
to the accounts maintained by Borrower at such banks set forth in such
exhibit or, in the event one or more of such banks shall not enter into
such blocked account agreements, Borrower shall substitute one or more
banks reasonably acceptable to Agent and deliver to Agent within two
hundred and seventy (270) days after the Closing Date blocked account
agreements in substantially the form annexed hereto as Exhibit 5.6 or
otherwise reasonably acceptable to Agent duly executed by Borrower and each
of such banks such that each concentration account maintained by Borrower
and each other account of Borrower at such bank is subject to a blocked
account agreement reasonably acceptable to Agent.
3. Conditions. The effectiveness of this Amendment is subject to the
following conditions precedent (unless specifically waived in writing by Agent):
(a) Borrower shall have executed and delivered such other documents
and instruments as Agent may require;
(b) All proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other legal
matters incident thereto shall be satisfactory to Agent and its legal counsel;
and
(c) No Default or Event of Default shall have occurred and be
continuing.
4
<PAGE> 5
4. CORPORATE ACTION. The execution, delivery, and performance of this
Amendment has been duly authorized by all requisite corporate action on the
part of Borrower and this Amendment has been duly executed and delivered by
Borrower.
5. SEVERABILITY. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
6. REFERENCES. Any reference to the Agreement contained in any document,
instrument or agreement executed in connection with the Agreement, shall be
deemed to be a reference to the Agreement as modified by this Amendment.
7. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original, but all of which
taken together shall be one and the same instrument.
8. RATIFICATION. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions of the
Agreement, and shall not be deemed to be a consent to the modification or
waiver of any other term or condition of the Agreement. Except as expressly
modified and superseded by this Amendment, the terms and provisions of the
Agreement are ratified and confirmed and shall continue in full force and
effect.
[SIGNATURES ARE ON FOLLOWING PAGES.]
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed under seal and delivered by
their respective duly authorized officers on the date first
written above.
CHIEF AUTO PARTS INC., as Borrower
By: /s/ THOMAS A. HOUGH
-------------------------------
Title:
----------------------------
HELLER FINANCIAL, INC.,
as a Lender and as Agent
By:
-------------------------------
Title:
----------------------------
WELLS FARGO BANK, N.A., as a Lender
By:
-------------------------------
Title:
----------------------------
THE CIT GROUP/BUSINESS CREDIT, INC.,
as a Lender
By:
-------------------------------
Title:
----------------------------
THE CHASE MANHATTAN BANK,
as a Lender
By:
-------------------------------
Title:
----------------------------
[SIGNATURES CONTINUE ON FOLLOWING PAGE.]
6
<PAGE> 7
BANK ONE, TEXAS N.A., as a Lender
By:
----------------------------------
Title:
-------------------------------
FLEET CAPITAL CORPORATION,
as a Lender
By:
----------------------------------
Title:
-------------------------------
BANKBOSTON, N.A., as a Lender
By:
----------------------------------
Title:
-------------------------------
NATIONSBANK OF TEXAS, N.A., as a Lender
By:
----------------------------------
Title:
-------------------------------
7
<PAGE> 1
EXHIBIT 12.1
CHIEF AUTO PARTS INC.
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Dollars in thousands
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------------------------------- -----------------------
Six Months
Years Ended ---------------------- Year
------------------------------------- Ended Ended Ended
Dec. 28, Dec. 29, Dec. 31, Dec. 25, June 26, Dec. 26,
1997 1996 1995 1994 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 2,860 $ 1,104 $ 9,479 $ (8,098) $ 1,417 $ 226
Plus provision for income taxes 1,935 359 5,500 537 1,383 370
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes 4,795 1,463 14,979 (7,561) 2,800 596
Adjustments:
Fixed charges, as below 26,302 15,808 14,426 6,255 9,318 19,090
Interest income, as below (104) (140) (142) (22) (11) (43)
-------- -------- -------- -------- -------- --------
Earnings (loss), as adjusted $ 30,993 $ 17,131 $ 29,263 $ (1,328) $ 12,107 $ 19,643
======== ======== ======== ======== ======== ========
Fixed charges:
Interest expense, net $ 15,357 $ 6,203 $ 6,009 $ 2,533 $ 5,807 $ 12,014
Remove effect of interest income 104 140 142 22 11 43
Portion of rent expense representative
of interest factor (one-third) 10,841 9,465 8,275 3,700 3,500 7,033
-------- -------- -------- -------- -------- --------
Total fixed charges $ 26,302 $ 15,808 $ 14,426 $ 6,255 $ 9,318 $ 19,090
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges 1.18 1.08 2.03 * 1.30 1.03
======== ======== ======== ======== ======== ========
</TABLE>
* Earnings were insufficient to cover fixed charges and accordingly, such ratio
is not presented.
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
Each director and/or officer of Chief Auto Parts Inc. (the "Company") whose
signature appears below hereby appoints David H. Eisenberg and Thomas A. Hough
as the undersigned's attorneys or any of them individually as the undersigned's
attorney, to sign, in the undersigned's name and behalf and in any and all
capacities stated below, and to cause to be filed with the Securities and
Exchange Commission (the "Commission"), the Company's Annual Report on Form 10-K
(the "Form 10-K") for the fiscal year ended December 28, 1997, and likewise to
sign and file with the Commission any and all amendments to the Form 10-K, and
the Company hereby also appoints such persons as its attorneys-in-fact and each
of them as its attorney-in-fact with like authority to sign and file the Form
10-K and any amendments thereto granting to each such attorney-in-fact full
power of substitution and revocation, and hereby ratifying all that any such
attorney-in-fact or the undersigned's substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 26th day of March, 1998.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ DAVID H. EISENBERG President, Chief Executive Officer
- ----------------------------- and Chairman of the Board
David H. Eisenberg
Senior Vice President - Finance, Treasurer,
/s/ THOMAS A. HOUGH and Chief Financial Officer
- ----------------------------- (Principal Financial Officer)
Thomas A. Hough
/s/ PATRICK J. CORBETT Director of Financial Reporting
- ----------------------------- (Principal Accounting Officer)
Patrick J. Corbett
/s/ HAROLD S. EASTMAN
- ----------------------------- Director
Harold S. Eastman
/s/ STEPHEN A. KAPLAN
- ----------------------------- Director
Stephen A. Kaplan
/s/ RICHARD MASSON
- ----------------------------- Director
Richard Masson
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 1,176
<SECURITIES> 0
<RECEIVABLES> 13,626
<ALLOWANCES> 300
<INVENTORY> 148,181
<CURRENT-ASSETS> 167,716
<PP&E> 124,080
<DEPRECIATION> 33,145
<TOTAL-ASSETS> 314,735
<CURRENT-LIABILITIES> 96,917
<BONDS> 174,194
0
0
<COMMON> 1
<OTHER-SE> 7,197
<TOTAL-LIABILITY-AND-EQUITY> 314,735
<SALES> 464,665
<TOTAL-REVENUES> 464,665
<CGS> 270,150
<TOTAL-COSTS> 270,150
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,357
<INCOME-PRETAX> 4,795
<INCOME-TAX> 1,935
<INCOME-CONTINUING> 2,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,860
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CHIEF AUTO PARTS INC.
CERTAIN RISK FACTORS
The following factors, among others, could affect the Company's actual results,
including its revenues, expenses and net income, and could cause them to differ
from any forward-looking statements made by or on behalf of the Company. The
factors set forth below are not exhaustive. New factors emerge from time to
time and it is not possible for management to predict all such factors, nor can
it assess the impact of each such factor on the business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company has a significant amount of indebtedness. As a result, the Company
is highly leveraged and has substantial repayment obligations, as well as a
significant amount of interest expense. The degree to which the Company is
leveraged could have important consequences, 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 existing indebtedness, thereby
reducing the funds available to the Company for other purposes; (iii) the
agreements governing the Company's indebtedness contain certain restrictive
financial and operating covenants; (iv) all of the indebtedness under the
Company's $100 million revolving credit loan (the "100 million Revolving Credit
Loan") are at variable rates of interest, which causes the Company to be
vulnerable to increases in interest rates; (v) all of the indebtedness under
the $100 million Revolving Credit Loan are secured by all inventory and
accounts receivable of the Company; (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.
RESTRICTIVE LOAN COVENANTS
The $100 million Revolving Credit Loan includes certain covenants that, among
other things, restrict (i) the making of investments, loans and advances and
the paying of dividends and other restrictive payments; (ii) the incurrence of
additional indebtedness; (iii) the granting of liens, other than liens created
pursuant to the $100 million Revolving Credit Loan 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 $100 million Revolving
Credit Loan requires the Company to maintain certain financial ratios. All of
these restrictive covenants may restrict the Company's ability to expand or to
pursue its business strategies.
CONCENTRATION OF OWNERSHIP
TCW Special Credits Fund V -- The Principal Fund (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., control the power to vote approximately 87.8%
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.
- 1 -
<PAGE> 2
Chief Auto Parts Inc.
Certain Risk Factors, cont.
CHANGE OF CONTROL
A change of control could require the Company to refinance substantial amounts
of indebtedness. 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
indebtedness or (ii) sufficient assets to satisfy all of its obligations under
the indebtedness.
COMPARABLE STORE SALES
The Company's comparable store sales increased 1.8% in fiscal 1997, but
declined 2.6% in fiscal 1996. Although the Company believes that comparable
store sales declines in fiscal 1996 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 decline in the future.
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.
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 1997, the Company purchased
approximately 10.9% of its products from Echlin, Inc., a supplier of ignition
parts, fuel pumps, brakes and brake parts and purchased approximately 11% 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.
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 than the
Company.
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
- 2 -
<PAGE> 3
Chief Auto Parts Inc.
Certain Risk Factors, cont.
vehicles and vehicle parts, which may reduce the demand for DIY repair parts.
In addition, approximately 23.0% of the Company's stores are located in Texas
and 70.7% 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.
LITIGATION
The Company is a defendant in a class action entitled "Doug Winfrey, et. al. on
their own behalf and on behalf of a class and all others similarly situated, v.
Chief Auto Parts Inc., et. al.," filed in The Superior Court of California,
County of San Joaquin on August 22, 1995 and then transferred to The Superior
Court of California, County of San Francisco on October 26, 1995. The Superior
Court denied the plaintiffs' motion for class certification on December 7,
1996. On February 6, 1998, the Court of Appeal reversed the Superior Court's
order denying class certification. No substantive proceedings regarding the
merits of this lawsuit have yet occurred.
The plaintiffs allege that the Company has a policy and practice of denying
hourly employees in California mandated rest periods during their scheduled
hours of work. The plaintiffs are seeking damages, restitution, disgorgement of
profits, statutory penalties, declaratory relief, injunctive relief,
prejudgment interest, and reasonable attorneys fees, expenses and costs.
Management is unable to predict the outcome of this lawsuit at this time. The
Company believes that the potential damages recoverable by any single plaintiff
are minimal. However, if the plaintiff class were to prevail on all of their
claims, the amount of damages could be substantial. The Company is vigorously
defending against this action.
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 The Southland Corporation ("Southland") against losses
associated with any environmental contamination existing on the date of the
sale of the Company by Southland, but there can be no assurance that Southland
would be able to pay any such indemnification claims.
- 3 -
<PAGE> 4
Chief Auto Parts Inc.
Certain Risk Factors, cont.
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.
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 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.
The Company has initiated formal communications with its primary business
partners to determine the extent to which the Company is exposed to failure by
those third parties to remediate their own Year 2000 conversion issues. The
Company's total Year 2000 conversion project cost and its estimates to complete
necessary actions include the estimated costs and time associated with the
impact of its business partners' Year 2000 conversion issues and are based on
information presently available. There can be no guarantee that the systems of
other companies on which the Company's systems rely will be timely converted,
or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company does not believe that it has a material
contingency related to its Year 2000 conversion for the products it has sold.
The Company is also in the process of addressing its Year 2000 issues. It is
addressing these issues by replacing its primary information system components;
communicating with its primary business partners to determine the extent to
which the Company is exposed to the failure of those third parties to remediate
their own Year 2000 issues; utilizing internal and external resources to
identify and assess the Year 2000 functionality of the Company's present point-
of-sale system, networks and personal computers; and testing and authenticating
systems from all significant system vendors. There can be no assurance that the
Company's systems or the systems of other companies on which the Company's
systems rely will be timely installed or converted. The failure of the Company,
its significant business partners, or its significant system vendors to
complete the installation or conversion to a Year 2000 compliant system could
have a material adverse effect on the Company.
The costs of the Year 2000 conversion and the date on which the Company plans to
complete the project are based upon management's best estimates, which were
derived utilizing numerous assumptions of future events. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that could cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties.
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