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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 001-13927
CSK AUTO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0765798
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
645 E. MISSOURI AVE. SUITE 400, PHOENIX, ARIZONA 85012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED:
------------------- ------------------------------------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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 [ ] No [X]. The Company completed
an initial public offering on March 17, 1998. This Report on Form 10-K is the
first filing required subsequent to the completion of the offering.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 28, 1998, there were 27,738,388 shares of the Company's common
stock, $.01 par value, issued and outstanding. As of such date, 8,625,000 shares
of such common stock, having an aggregate market value of approximately
$219,937,500 were held by non-affiliates. For purposes of the above statement
only, all executive officers of the registrant are assumed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference into Part II hereof is the Company's Registration
Statement on Form S-1 (File No. 333-43211).
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6. Selected Consolidated Financial Data........................ 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 8. Consolidated Financial Statements and Supplementary Data.... 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 47
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 54
Item 13. Certain Relationships and Related Transactions.............. 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 60
NOTE CONCERNING FORWARD-LOOKING INFORMATION
This Report contains various forward-looking statements and information
that are based upon information currently available to management. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or expected. Such forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "intend," "estimate" or "continue" or the negative thereof
or comparable terminology and may include, among other things, expected growth,
store openings, relocations and expansions, business strategies, future revenues
and future operating performance. Factors that might cause actual results to
differ materially from those in such forward-looking statements include, but are
not limited to, those discussed in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is the largest retailer of automotive parts and accessories in
the Western United States and one of the largest such retailers in the United
States based, in each case, on its number of stores. As of February 1, 1998, the
Company operated 718 stores as one fully integrated company primarily under
three brand names: Checker Auto Parts, founded in 1968 and operating in the
Southwestern and Rocky Mountain states; Schuck's Auto Supply, founded in 1917
and operating in the Pacific Northwest; and Kragen Auto Parts, founded in 1947
and operating primarily in California. Each has a long operating history,
established name recognition and a loyal customer base. Based on store count,
the Company believes it is the largest retailer of automotive parts and
accessories in 20 of its 27 markets. The Company is a holding company and
conducts its operations through its wholly-owned subsidiary, CSK Auto, Inc.,
("Auto"). Unless otherwise indicated, the term "the Company" refers collectively
to CSK Auto Corporation and CSK Auto, Inc.
The Company is a consumer-oriented, specialty retailer primarily servicing
the do-it-yourself ("DIY") customer, with a significant and increasing emphasis
on the commercial customer. The Company offers a broad selection of national
brand name and private label automotive products for domestic and imported cars,
vans and light trucks, including new and remanufactured automotive replacement
parts, maintenance items and accessories. The Company's stores typically offer
between 13,000 and 16,000 stock keeping units ("SKUs"), and more than 565 of the
Company's stores can provide customers, on a same-day delivery basis, an
additional 200,000 SKUs not regularly stocked in these stores. The Company's
operating strategy is to offer its products at everyday low prices and at
conveniently located and attractively designed stores, supported by highly
trained, efficient and courteous customer service personnel. As a specialty
retailer, the Company has chosen not to sell tires or perform automotive
repairs.
RECENT TRANSACTIONS
In October 1996, certain affiliates of Investcorp and certain other
investors (collectively with Investcorp, the "Investcorp Group") acquired a 51%
common equity interest in the Company for $105.0 million in cash from the Carmel
Trust, a trust governed by the laws of Canada ("Carmel"), which previously had
held 100% of the common equity interests in the Company. A corporation in which
an affiliate of Investcorp held a minority interest also purchased $40.0 million
in aggregate principal amount of the Company's 12% Subordinated Notes for $40.0
million in cash, and the Company in turn purchased $40.0 million of preferred
stock of Auto. Transatlantic Finance, Ltd., an affiliate of Carmel
("Transatlantic," and with Carmel, the "Carmel Group") purchased $10.0 million
in aggregate principal amount of the Company's 12% Subordinated Notes, and the
Company in turn purchased $10.0 million of preferred stock of Auto. Auto then
borrowed $100.0 million under its new senior credit facility (the "Senior Credit
Facility"), which together with the net proceeds from the sale of $125.0 million
of Auto's 11% Senior Subordinated Notes due 2006 and the net proceeds from the
sale by Auto to the Company of $50.0 million of preferred stock, following a
dividend to the Company by Auto, was used to redeem the stock of the Company
held by Carmel for $238.5 million. Carmel then purchased from the Company for
$100.9 million a 49% common equity interest in the Company. Auto then repaid
amounts outstanding under a then existing credit agreement, which was
terminated, and paid $9.9 million to members of management pursuant to
previously existing equity participation agreements and incurred additional
expenses of $22.7 million related to the foregoing. The foregoing transactions
are referred to collectively as the "Acquisition and Financings." Following the
Acquisition and Financings, the Investcorp Group owned a 51% common equity
interest in the Company, a corporation in which an affiliate of Investcorp held
a minority interest owned $40.0 million in aggregate principal amount of the
Company's 12% Subordinated Notes, Carmel owned a 49% common equity interest in
the Company, Transatlantic owned $10.0 million in aggregate principal amount of
the Company's 12% Subordinated Notes and the Company owned 100% of the common
equity and $50.0 million of preferred stock of Auto. See Item 12. Security
Ownership of Certain Beneficial Owners and Management.
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On December 8, 1997, the Company acquired 82 stores (the "Trak West"
stores) located in the Los Angeles market from Trak Auto Corporation (the "Trak
West Acquisition") for a total cost of approximately $34.5 million, which was
funded with a $22.0 million equity investment by affiliates of the Company's
existing stockholders and additional bank borrowings. The Company has converted
the Trak West stores to the Kragen name and store format and integrated these
stores into the Company's operations. The Trak West Acquisition provides the
Company with a greater presence (a total of 147 stores) in the large,
strategically important Los Angeles market, without adding additional retail
square footage to the market.
On March 17, 1998, the Company completed an initial public offering of
approximately 8.6 million shares of its common stock (the "Offering"). The
Offering generated net proceeds of approximately $159.1 million which were used
to reduce outstanding debt of the Company. See Item 7. Management's Discussion
and Analysis of Financial Conditions of Results of Operations -- Liquidity and
Capital Resources.
MARKETING AND MERCHANDISING STRATEGY
The Company's marketing and merchandising strategy is to build market share
by providing a broad selection of national brand name and private label products
at everyday low prices. The Company offers these products at conveniently
located and attractively designed stores, supported by highly trained, efficient
and courteous customer service personnel.
CUSTOMER SERVICE
The Company is a customer-oriented retailer dedicated primarily to DIY
consumers with a significant and increasing focus on the commercial customer.
The Company's sophisticated, centralized infrastructure and store-based
information systems, as well as its extensive training programs, are designed to
enhance customer service.
The Company believes that recruiting, training and retaining high quality
sales associates is a major component of successful retailing. The Company has
implemented training programs and incentives to encourage the development of
technical expertise by its sales associates, which then enables them to
effectively advise customers on product selection and use. In addition to
providing a high level of customer satisfaction, well trained associates
increase productivity and thereby reduce labor costs. CSK University, the
Company's sales associate development program, is dedicated to the continuous
improvement of store associates through structured on-the-job training and
formal classroom education. The curriculum focuses on four areas of the
associates' development: (i) customer service skills; (ii) basic automotive
systems; (iii) advanced automotive systems; and (iv) management development.
Much of the training is delivered through formal classes in 16 training centers
that are fully equipped with the same systems as are in the Company's stores.
The Company believes that its training programs enable sales associates to
provide a high level of service to a wide variety of customers ranging from less
informed DIY consumers to more sophisticated purchasers requiring diagnostic
advice. The Company also provides continuing training programs for store
managers and district managers designed to assist them in increasing store-level
efficiency and improving their potential for promotion. In addition, the Company
requires periodic meetings of district and store managers to facilitate and
enhance communications within the organization.
In order to satisfy its customers, the Company has adopted several service
initiatives including free testing of starters, alternators and batteries; free
charging of batteries; installation assistance for batteries, windshield wipers
and other selected products; "no hassle" return policies; and electronically
maintained lifetime warranties, which eliminate the need for consumer record
keeping. The Company's significant investments in store associate training and
store-level information systems have enabled its in-store personnel to devote
more time to attending to their customers' automotive needs.
PRODUCT SELECTION
The Company's objective is to carry a broad selection of national brand
name products that generate customer traffic and have strong appeal to its
commercial customers. In addition, the Company stocks a wide selection of high
quality private label products that appeal to value conscious customers. Each
store offers an
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extensive product line, including automotive replacement parts such as starters,
alternators, shock absorbers, mufflers, brakes, spark plugs, filters and
batteries, as well as a wide variety of maintenance items, such as motor oil,
lubricants, waxes, cleaners, polishes and antifreeze. In addition, each store
offers general accessories such as car stereos, alarms, trim, floor mats, tools
and seat covers.
The Company's stores, which average approximately 6,900 square feet in
size, offer between 13,000 and 16,000 SKUs of well-known national brand name and
private label automotive products. In the event that a store does not carry a
specific part, associates are able to utilize the Company's recently implemented
Surround Store Inventory Program or access the Company's Priority Parts
operation. In June 1997, the Company implemented its Surround Store Inventory
Program which, in the event a particular product is unavailable at a store,
enables a sales associate at that store to attempt to locate the requested
product from stores in the same market and the Priority Parts depots. This
program enables an associate to record the sale, reserve the part at the
neighboring store and direct the customer to pick it up. Additionally, the
Company has continued to expand its Priority Parts operation by improving its
delivery system and increasing to 19 from 2 its number of strategically located
Priority Parts depots, which has enabled the Company to (i) better serve its
customers by making available through supplier relationships to more than 565 of
its stores up to an additional 200,000 SKUs on a same-day delivery basis and
1,000,000 SKUs on a next-day delivery basis to all of its stores and (ii)
increase sales to commercial accounts due to broader availability of automotive
replacement parts.
PRICING
The Company's pricing philosophy is to not lose a customer because of
price. The Company's pricing strategy is to offer everyday low prices at each of
its stores. The Company offers to beat by 5% any competitor's lower price. As a
result, the Company closely monitors its competitors' pricing levels to ensure
competitive pricing in all of the Company's stores.
ADVERTISING
The Company supports its marketing and merchandising strategy through print
advertising, in-store promotional displays and an increasing emphasis on radio
and television. The Company advertises in print through the use of monthly color
circulars. The circulars, which are produced by the Company's in-house
advertising department, emphasize specific products and contain redeemable
coupons. The Company advertises on radio, television and billboards primarily to
reinforce the Company's image and name recognition. Television advertising is
targeted to sports programming and radio advertising primarily is aired during
drive time. The Company's in-store signs and displays are used to promote
products and identify departments, as well as to announce store specials. The
Company also has web sites on the Internet at: (i) http://www.checkerauto.com,
(ii) http://www.schucks.com and (iii) http://www.kragen.com.
STORE-BASED INFORMATION SYSTEMS
Over the past several years, the Company has installed several store-level
information systems, which have improved store labor productivity and customer
service. The Company's store-based information systems are described below.
The Company has installed a point of sale system ("POS") consisting of
sophisticated cash registers and software in all of its stores, which
electronically capture and report customer transactions. The Company has
upgraded and expanded the capabilities of its Electronic Parts Catalog ("EPC"),
which is installed in each of its stores. The EPC is a software-based system
that identifies the location and availability of over one and a half million
parts. The EPC is a user-friendly tool that enables the Company's sales
associates to assist customers in parts selection and ordering based on simple
input of the year, model and engine type and application needed. Once provided
with this basic information, the EPC displays which part is needed and whether
it is located in the store. The EPC also displays related parts that the sales
associates can recommend to the customer for purchase and prints parts lists for
the customer. The Company's EPC system is integrated with its POS system and
centralized Company database. The Company's satellite communications network
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links all of its stores with its corporate office. The satellite network enables
the Company to efficiently obtain and deliver to its stores all file transfers,
including pricing down-loads, sales information updates and interactive
transactions such as electronic parts ordering, and significantly increases the
speed of credit card and check authorization. The system also broadcasts common
files to all stores simultaneously to update the EPC.
STORE OPERATIONS
The Company operates as one business segment, with stores divided into
seven geographic regions: Southwest, Rocky Mountain, Northwest, Los Angeles,
Coastal California, Southern California and Northern California. Each region is
administered by a regional manager that oversees six to nine district managers.
Each of the Company's district managers has responsibility for between 8 and 19
stores.
As of February 1, 1998, the geographic distribution of the Company's stores
and the tradenames under which they operate are set forth in the table below.
SCHUCK'S AUTO CHECKER AUTO KRAGEN AUTO COMPANY
SUPPLY PARTS PARTS TOTAL
------------- ------------ ----------- -------
California................. 1 1 358(1) 360(1)
Washington................. 83 -- -- 83
Arizona.................... -- 77 -- 77
Colorado................... -- 56 -- 56
Utah....................... -- 28 -- 28
Oregon..................... 24 -- -- 24
Texas...................... -- 21 -- 21
Nevada..................... -- 14 7 21
New Mexico................. -- 20 -- 20
Idaho...................... 13 3 -- 16
Montana.................... -- 9 -- 9
Wyoming.................... -- 3 -- 3
--- --- --- ---
Total................. 121 232 365 718
=== === === ===
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(1) Includes the 82 Trak West stores that have been converted to the Kragen name
and store format.
Stores generally are open seven days a week, with hours from 8:00 a.m. to
9:00 p.m. (9:00 a.m. to 6:00 p.m. on Sundays). Each store employs approximately
10 to 20 associates, including a store manager, two assistant store managers and
a staff of full-time and part-time associates.
STORE FORMATS
The Company's stores generally are located in high visibility, high traffic
strip shopping centers or in free-standing units adjacent to strip shopping
centers. The stores, which range in size from 2,800 to 27,000 square feet,
average approximately 6,900 square feet in size and offer between 13,000 and
16,000 SKUs.
The Company has designed four prototype stores of 6,000, 7,000, 8,000 and
12,000 square feet in size. The following table sets forth the Company's stores,
by size, as of February 1, 1998:
STORE SIZE NUMBER OF STORES
---------- ----------------
10,000 sq. ft. or greater................................... 75
8,000-9,999 sq. ft.......................................... 122
6,000-7,999 sq. ft.......................................... 181
5,000-5,999 sq. ft.......................................... 209
Less than 5,000 sq. ft...................................... 131
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Approximately 57% of the Company's stores are freestanding, with the
balance principally located within strip shopping centers. Approximately 85% to
90% of each store's square footage is selling space, of which approximately 40%
to 50% is dedicated to automotive replacement parts inventory.
STORE GROWTH STRATEGY
The Company's store growth strategy is focused on the Company's existing
markets and includes (i) opening new stores, (ii) relocating smaller stores to
larger stores at better locations, and (iii) expanding selected stores. The
Company has identified most of its stores smaller than 5,000 square feet as
future relocation or expansion priorities.
The following table sets forth the Company's store development activities
during the periods indicated.
1995 1996 1997
---- ---- ----
Beginning stores........................................ 544 566 580
New stores.............................................. 24 19 65
Relocated stores........................................ 30 37 36
Acquired Trak West stores............................... -- -- 82
Closed stores (including relocated stores).............. (32) (42) (45)
--- --- ---
Ending stores........................................... 566 580 718
=== === ===
Expanded stores......................................... 9 8 3
Total new and relocated stores.......................... 54 56 101
On November 18, 1997, the Company reached an agreement with an unrelated
third party for the establishment of a leasing facility that will provide $125.0
million of financing for the acquisition and development of approximately 100 to
125 new stores over the period of February 1, 1998 through May 31, 1999. This
facility is on terms that are generally more favorable than the Company's prior
facility.
COMMERCIAL SALES PROGRAM
In addition to its primary focus on serving the DIY consumer, the Company
has significantly increased its marketing efforts to commercial customers within
the automotive replacement parts market. The Commercial Sales Program, which is
intended to facilitate penetration of this market, is targeted to professional
mechanics, auto repair shops, auto dealers, fleet owners, mass and general
merchandisers with auto repair facilities and other commercial repair outlets
located near the Company's stores. At February 1, 1998, the Company had
Commercial Sales Centers ("CSCs") in 360 of its stores. The Company intends to
continue installing CSCs in selected existing stores, in approximately half of
its new stores, and in 43 of the recently acquired Trak West stores (which did
not actively pursue commercial customers under prior ownership).
PURCHASING
Merchandise is selected and purchased for all stores by personnel at the
Company's corporate headquarters in Phoenix, Arizona from over 300 suppliers. No
one class of product and no single supplier accounted for as much as 10% of the
Company's purchases in fiscal 1997.
ASSOCIATES
As of February 1, 1998, the Company employed approximately 6,600 full-time
associates and 3,125 part-time associates. Approximately 85% of these personnel
are employed in store level operations, 8% in distribution and 7% in the
Company's corporate headquarters, including its Call Center and Priority Parts
operation.
The Company has never experienced any material labor disruption and
believes that its labor relations are excellent. Except for 402 employees
located at approximately 36 stores in the San Jose, California market,
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who have been represented by a union for more than 18 years, none of the
Company's personnel is represented by a labor union.
COMPETITION
The Company competes principally in the DIY market of the automotive
aftermarket. Although the number of competitors and the level of competition
vary by market area, the DIY market is highly fragmented and generally very
competitive. The Company competes primarily with national and regional retail
automotive parts chains, wholesalers or jobber stores (some of which are
associated with national automotive parts distributors or associations),
automobile dealers, and mass merchandisers that carry automotive replacement
parts, maintenance items and accessories. The Company believes that chains of
automotive parts stores, such as that operated by the Company, with multiple
locations in regional markets, have competitive advantages in marketing, product
selection, purchasing and distribution, as compared to independent retailers and
jobbers that are not part of a chain or associated with other retailers or
jobbers. The Company believes that, as a result of these advantages, national
and regional chains have been gaining market share in recent years at the
expense of independent retailers and jobbers.
The principal competitive factors that affect the Company's business are
store location, customer service, product selection, availability, quality and
price. While the Company believes that it competes effectively in its various
geographic areas, certain competitors are larger in terms of sales volume, have
greater financial and management resources and have been operating longer in
certain geographic areas.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company owns and has registered the service mark "Schuck's" with the
United States Patent and Trademark Office for use in connection with the
automotive parts retailing business. The Company owns the rights to use the
tradenames "Checker" (in connection with the automotive parts retailing business
in the West and Southwest regions of the United States) and "Kragen." In
addition, the Company owns and has registered numerous trademarks with respect
to many of its private label products. The Company believes that its various
tradenames, service marks and trademarks are important to its merchandising
strategy, but that its business is not otherwise dependent on any particular
service mark, tradename or trademark. There are no infringing uses known by the
Company that materially affect the use of such marks.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local laws and
governmental regulations relating to the operation of its business, including
those governing recycling of batteries and used lubricants, and regarding
ownership and operation of real property. The Company handles hazardous
materials during its operations, and its customers may also bring or use
hazardous materials or used oil onto the Company's properties. Additionally,
while the Company does not service automobiles, it does sublease pre-existing
service bays at a small number of store locations to third parties. The
operators of these service bays are required to dispose of certain items,
including used batteries, lubricants and oils in accordance with applicable
environmental regulations. The Company also currently provides a recycling
program for batteries and for the collection of used lubricants at certain of
its stores as a service to its customers pursuant to agreements with third-party
vendors. Pursuant to the agreements, the batteries and used lubricants are
collected by Company employees, deposited into vendor-supplied
containers/pallets and then disposed of by the third-party vendors. The
Company's agreements with such vendors are designed to limit its potential
liability under applicable environmental regulations for any harm caused by the
batteries and lubricants to off-site properties or even on-site when such
failure is the fault of the vendor. Many of the agreements provide for
indemnification of the Company against liability that it may incur in connection
with the disposal of such items.
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ITEM 2. PROPERTIES
The following table sets forth certain information concerning the Company's
principal properties:
PRIMARY USE LOCATION SQ. FOOTAGE NATURE OF OCCUPANCY
----------- ------------ ----------- -------------------
Corporate Office....................... Phoenix, AZ 96,000 Leased(1)
Distribution center.................... Dixon, CA 325,000 Leased
Distribution center.................... Phoenix, AZ 273,520 Leased
Regional distribution center........... Auburn, WA 52,400 Leased
Regional distribution center........... Denver, CO 34,800 Leased
Regional distribution center........... Salt Lake, 32,000 Leased
UT
Regional distribution center........... Commerce, CA 48,400 Leased
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(1) This facility is owned by Missouri Falls Partners, an affiliate of Carmel.
See Notes 4 and 7 to Item 8. Consolidated Financial Statements.
At February 1, 1998, all but two of the Company's stores were leased. The
expiration dates (including renewal options) of the store leases are summarized
as follows:
YEARS STORES(1)
----- ---------
1996-2000.................................................. 27
2001-2005.................................................. 67
2006-2010.................................................. 76
2011-2020.................................................. 293
2021-2030.................................................. 210
2031-thereafter............................................ 43
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(1) Of these stores, 30 are owned by affiliates of Carmel. See Notes 4 and 7 to
Item 8. Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. The damages claimed against the
Company in some of these litigations are substantial. Although the amount of
liability that may result from these matters cannot be ascertained, the Company
does not currently believe that, in the aggregate, they will result in
liabilities material to the Company's consolidated financial condition, results
of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1997, no matters were submitted to a
vote of security holders except as follows:
(a) On December 3, 1997, the Board of Directors of Company submitted an
amendment to the Company's Certificate of Incorporation to the Company's
stockholders, which was approved by the unanimous written consent of the
stockholders on such date. The amendment increased the number of shares of
capital stock authorized for issuance and increased the voting rights of certain
classes of the Company's capital stock.
(b) On December 18, 1997, the Board of Directors of Company submitted an
amendment to the Company's Certificate of Incorporation to the Company's
stockholders, which was approved by the unanimous written consent of the
stockholders on such date. The amendment changed the name of the Company from
"CSK Holdings, Ltd." to "CSK Auto Corporation".
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of April 28, 1998 there were 62 holders of record of the Company's
common stock. The Company's common stock commenced trading on the New York Stock
Exchange, under the symbol "CAO", on March 12, 1998. Consequently, no
information as to high and low sales prices is presented herein.
As of April 28, 1998, there were 27,738,388 shares of the Company's common
stock, issued and outstanding. As of such date, 8,625,000 shares of such common
stock, having an aggregate market value of approximately $219,937,500 were held
by non-affiliates. For purposes of the above statement only, all executive
officers of the registrant are assumed to be affiliates.
The Company has not paid cash dividends in any of the last two fiscal years
and does not anticipate paying cash dividends in the foreseeable future. The
Company expects that it will retain all available earnings generated by the
Company's operations for the growth and development of its business. Certain
debt instruments of the Company restrict the Company's ability to pay cash
dividends on its common stock and to make certain other restricted payments (as
defined therein).
In connection with the Trak West Acquisition in December 1997, South Bay
Limited, a member of the Investcorp Group ("South Bay"), and Transatlantic,
purchased additional stock of the Company for approximately $11.2 million and
$10.8 million, respectively. After giving effect to such purchases, the
Investcorp Group, having sold a portion of its common equity interest to the
Company's Chairman at its cost pursuant to a prior agreement, owned a 50.1%
common equity interest in the Company and the Carmel Group, having sold a
portion of its common equity to the Company's President at its cost pursuant to
a prior agreement, owned a 47.1% common equity interest in the Company.
Recent Sales of Unregistered Securities
"Recent Sales of Unregistered Securities" included in Part II, Item 15 of
the Company's Registration Statement on Form S-1 (File No. 333-43211) is
incorporated herein by reference.
Use of Proceeds from the Offering
On March 11, 1998, the Securities and Exchange Commission declared
effective the Company's registration statement on Form S-1 (File No. 333-43211)
covering the issuance by the Company of up to $181,125,000 aggregate offering
amount of the Company's common stock. The representatives of the underwriters of
the Offering were Donaldson, Lufkin & Jenrette Securities Corporation, Furman
Selz LLC, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith,
Incorporated, Morgan Stanley & Co. Incorporated and Smith Barney Inc. On March
17, 1998, the Company completed the Offering, with all shares of common stock
registered pursuant to such registration statement being sold, at an aggregate
offering price of $172,500,000.
The total proceeds to the Company of the Offering, less underwriting
discounts and commissions, were $160,425,000. In addition, the Company incurred
approximately $1,325,000 of expenses in connection with the Offering, consisting
primarily of the costs of registering the Offering under the Securities Act of
1993, as amended, and with the National Association of Securities Dealers, Inc.,
New York Stock Exchange listing application fees, legal and accounting fees, and
printing fees and expenses. The net proceeds to the Company
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of the Offering were approximately $159,100,000 which were used to reduce
outstanding debt of the Company, as follows (in millions):
12% Subordinated Notes...................................... $ 50.0
11% Senior Subordinated Notes............................... 43.8
Senior Credit Facility...................................... 53.8
Premiums on retirement...................................... 4.9
Accrued interest............................................ 6.6
------
$159.1
======
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated statement of
operations, balance sheet and operating data of the Company. The selected
statement of operations and balance sheet data for the two fiscal years ended
February 1, 1998 are derived from the Company's Consolidated Financial
Statements, which have been audited by Coopers & Lybrand L.L.P., independent
accountants, and appear elsewhere herein. The selected statement of operations
and balance sheet data for each of the two fiscal years during the period ended
January 28, 1996 are derived from the Company's Consolidated Financial
Statements, which have been audited by Price Waterhouse LLP, independent
accountants, and which, in the case of fiscal year 1995, appears elsewhere
herein. The selected statement of operations and balance sheet data for the
fiscal year ended January 30, 1994 are derived from the Company's unaudited
Consolidated Financial statements. The data presented below should be read in
conjunction with Item 8. Consolidated Financial Statements and Notes thereto,
the other financial information included herein and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
FISCAL YEAR(1)
-----------------------------------------------------------
FEB. 1, FEB. 2, JAN. 28, JAN. 29, JAN. 30,
1998 1997(2) 1996(3) 1995(4) 1994(9)
---------- ---------- --------- --------- ---------
Net sales............................ $845,815 $793,092 $718,352 $688,135 $744,541
Cost of sales........................ 468,171 463,374 433,817 410,358 456,263
Operating and administrative
expenses........................... 326,198 298,004 281,387 255,922 273,836
Store closing costs.................. 1,640 14,904 3,310 2,678 3,526
Transition and integration
expenses........................... 3,407 -- -- -- --
Stock-based compensation............. 909 -- -- -- --
Acquisition charge-equity
participation agreements........... -- 20,174 -- -- --
--------- --------- --------- --------- ---------
Operating profit (loss).............. 45,490 (3,364) (162) 19,177 10,916
Other Acquisition and Financings
expenses........................... 1,009 12,463 -- -- --
Loss on sale of subsidiary........... -- -- -- -- 1,056
Interest expense..................... 40,680 20,691 14,379 10,343 11,752
--------- --------- --------- --------- ---------
Income (loss) before taxes and
extraordinary item................. 3,801 (36,518) (14,541) 8,834 (1,892)
Income tax expense (benefit)......... 1,557 (11,859) (5,447) 68 (731)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item............................... 2,244 (24,659) (9,094) 8,766 (1,161)
Extraordinary loss (gain), net of
income taxes....................... 3,015 -- -- (97,186) --
--------- --------- --------- --------- ---------
Net income (loss).................... $ (771) $(24,659) $ (9,094) $105,952 $ (1,161)
========= ========= ========= ========= =========
Diluted net income (loss) per share
before extraordinary items......... $ 0.12 $ (2.28) $ (1.04) $ 1.00 $ (0.13)
Weighted average shares used for
computation........................ 18,011,666 10,818,913 8,723,550 8,723,550 8,723,550
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FISCAL YEAR(1)
-----------------------------------------------------------
FEB. 1, FEB. 2, JAN. 28, JAN. 29, JAN. 30,
1998 1997(2) 1996(3) 1995(4) 1994(9)
---------- ---------- --------- --------- ---------
OTHER DATA:
EBITDA(5)............................ $ 70,173 $ 50,544 $16,099 $ 32,282 $ 23,102
EBITDAR(5)........................... 124,695 98,450 61,453 70,964 58,595
Capital expenditures................. 20,132 6,317 11,640 14,597 14,910
Net cash provided by (used in)
operating activities............... (62,703) (38,366) 1,354 15,120 18,602
Net cash used in investing
activities......................... (56,727) (10,686) (7,888) (18,983) (14,943)
Net cash provided by (used in)
financing activities............... 119,059 49,911 8,028 (5,383) 227
SELECTED ADDITIONAL OPERATING DATA:
Total store square footage (at period
end)(000s)(6)(8)................... 4,277 3,631 3,329 3,097 2,992
Average net sales per store(6)(8).... $1,313 $1,384 $1,294 $1,272 $1,215
Average net sales per store square
foot(6)(8)......................... $211 $228 $224 $226 $223
Percentage increase in comparable
store net sales(7)................. 4% 6% 2% 5% 10%
Stores open at end of period......... 718 580 566 544 538
AS OF
-----------------------------------------------------------
FEB. 1, FEB. 2, JAN. 28, JAN. 29, JAN. 30,
1998 1997 1996 1995 1994
---------- ---------- --------- --------- ---------
BALANCE SHEET DATA:
Net working capital.................. $235,651 $ 121,157 $ 81,048 $ 77,627 $ 78,003
Total assets......................... 563,251 443,986 391,319 350,830 294,806
Total debt (including current
maturities)........................ 439,962 335,680 122,003 105,601 187,807
Stockholder's equity (deficit)....... (75,055) (102,263) 59,997 69,091 (36,861)
- ---------------
(1) The Company's fiscal year consists of 52 or 53 weeks ending on the Sunday
nearest to January 31 of the following calendar year. All fiscal years
presented are 52 weeks except for the fiscal year ended February 2, 1997
which consists of 53 weeks.
(2) Amounts hereunder reflect certain non-recurring charges which were incurred
in October 1996 when the Acquisition and Financings were consummated,
including the following: (i) amounts paid to members of management pursuant
to existing equity participation agreements of $19.9 million ($20.2 million
including a provision for estimated payroll taxes thereon), of which $9.9
million was paid in October 1996 (the remaining balance was paid in November
1997), and (ii) expenses incurred in connection with the Acquisition and
Financings of $12.5 million. Amounts hereunder also include a charge of
$12.9 million for store closing costs. See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note 12 to
Item 8. Consolidated Financial Statements.
(3) Results of operations in fiscal 1995 include the following non-recurring
items: (i) cost of sales includes preopening expenses of $1.6 million
associated with the opening of the new distribution center in Phoenix,
Arizona; and (ii) operating and administrative expenses include $5.3 million
of non-recurring software development costs associated with the new
store-level information systems installed by the Company during fiscal 1995.
In addition, the Company believes that its operations and operating results
were adversely impacted during fiscal 1995 as a result of the start up costs
associated with the implementation of many new initiatives. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(4) Net income in fiscal 1994 includes an extraordinary gain of $97.2 million
resulting from cancellation of a portion of the Company's long-term debt.
(5) EBITDA represents income before net interest expense, provision for income
taxes, depreciation and amortization expense, other non-cash charges,
extraordinary items and non-recurring charges. While
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EBITDA is not intended to represent cash flow from operations as defined by
GAAP (and should not be considered as an indicator of operating performance
or an alternative to cash flow (as measured by GAAP)), it is included herein
because the Company's management believes it is a meaningful measure which
provides additional information with respect to the ability of the Company
to meet its future debt service, capital expenditure and working capital
requirements. EBITDA has been calculated as described above in accordance
with the terms of the indenture under which Auto's 11% Senior Subordinated
Notes were issued and may differ in method of calculation from similarly
titled measures used by other companies. See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations. The
computation of EBITDA for each of the respective periods shown is as follows
(in thousands):
FISCAL YEAR
-----------------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- ------- -------
Income (loss) before income
taxes and extraordinary
item......................... $ 3,801 $(36,518) $(14,541) $ 8,834 $(1,892)
Plus:
Interest expense, net.......... 40,680 20,691 14,379 10,343 11,762
Depreciation and amortization
expense...................... 20,367 19,225 16,261 13,105 12,176
Non-recurring Acquisition &
Financings and conversion
expenses..................... 4,416 32,637 -- -- --
Other non-recurring and
non-cash charges............. 909 14,509 -- -- 1,056
------- -------- -------- ------- -------
Total..................... $70,173 $ 50,544 $ 16,099 $32,282 $23,102
======= ======== ======== ======= =======
EBITDAR represents EBITDA plus operating lease rental expense. Because the
proportion of stores leased versus owned varies among the industry
competitors, the Company believes that EBITDAR permits a meaningful
comparison of operating performance among industry competitors. The Company
leases substantially all of its stores.
(6) Total store square footage is based on the Company's actual store formats
which include normal selling, office, stockroom and receiving space. Average
net sales per store and average net sales per store square foot are based on
the average of beginning and ending number of stores and store square
footage and are not weighted to take into consideration the actual dates of
store openings, closings or expansions.
(7) Comparable store net sales data is calculated based on the change in net
sales commencing after the time a new store has been open twelve months. The
first twelve months a new store is open are not included in the comparable
store calculation. Relocations are included in comparable store net sales
from the date of opening.
(8) Excludes the store count and square footage of the Trak West stores acquired
on December 8, 1997.
(9) The Company was formed in July 1993 as a holding company for an entity which
owned (i) Auto, (ii) another retailer of automotive parts and accessories,
and (iii) other immaterial operations. The information provided for fiscal
1993 prior to the formation of the Company reflects the operations of this
entity on a predecessor basis, all of which operations other than Auto were
sold, liquidated or disposed of prior to December 31,1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As used in this section, fiscal 1997 represents the 52 weeks ended February
1, 1998; fiscal 1996 represents the 53 weeks ended February 2, 1997 and fiscal
1995 represents the 52 weeks ended January 28, 1996.
12
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GENERAL
The Company is the largest retailer of automotive parts and accessories in
the Western United States and one of the largest such retailers in the United
States based, in each case, on its number of stores. As of February 1, 1998, the
Company operated 718 stores as one fully integrated company primarily under
three brand names: Checker Auto Parts, founded in 1968 and operating in the
Southwestern and Rocky Mountain states; Schuck's Auto Supply, founded in 1917
and operating in the Pacific Northwest; and Kragen Auto Parts, founded in 1947
and operating primarily in California. Each has a long operating history,
established name recognition and a loyal customer base. Based on store count,
the Company believes that it is the largest retailer of automotive parts and
accessories in 20 of its 27 markets.
Upon the consummation of the Offering, the Company recorded an
extraordinary loss of approximately $6.9 million, net of taxes. Such
extraordinary loss consists primarily of the premiums paid in connection with
the redemption of indebtedness and the write-off of a portion of deferred debt
issuance costs. In addition, upon the consummation of the Offering, the Company
recorded a one-time charge of approximately $3.6 million relating to the
unamortized portion of deferred management fees written-off in connection with
the termination of a management advisory and consulting services agreement with
Investcorp International Inc. Additionally, in connection with the amendment and
restatement of the Senior Credit Facility on December 8, 1997, the Company
recorded an extraordinary loss of approximately $3.0 million, net of taxes,
attributable to the write-off of a portion of deferred debt issuance costs. In
addition, the Company expects to incur certain one-time charges in connection
with the Trak West Acquisition. See "Trak West Acquisition."
In the fourth quarter of fiscal 1997, the Company issued 180,600 shares of
its common stock and options to purchase 135,991 shares of its common stock to
certain of the Company's executives. In connection with the issuance of such
common stock and options, the Company recognized a charge to earnings in the
fourth quarter of fiscal 1997 totaling $0.9 million for the difference between
the issuance price and the fair market value of the common stock at the date of
sale. In addition, the Company recorded deferred compensation totaling $0.5
million for the difference between the exercise price and the fair market value
at the date of grant of the aforementioned options. The deferred compensation
will produce a charge to earnings over the vesting period of the options.
Trak West Acquisition
On December 8, 1997, the Company acquired the 82 Trak West stores located
in the Los Angeles market from Trak Auto Corporation. The Trak West Acquisition
provides the Company with a much greater presence (a total of 147 stores) in the
large, strategically important Los Angeles market, without adding additional
retail square footage to the market. The Company has completed the conversion of
these stores to the Kragen name and store format and the integration of these
stores into the Company's operations. The Company acquired these stores for a
total cost of approximately $34.5 million. The Trak West Acquisition was funded
with a $22.0 million equity investment by affiliates of the Company's existing
stockholders and additional bank borrowings and was accounted for under the
purchase method of accounting.
In connection with the integration of the Trak West stores, the Company
will incur one-time transition expenses of up to $6.0 million, consisting
primarily of grand opening advertising, training and re-merchandising costs.
Approximately $3.4 million of such expenses were incurred during the fourth
quarter of fiscal 1997 with the balance to be incurred during the first quarter
of fiscal 1998. In addition, the Company will incur one-time capital
expenditures of approximately $6.0 million, consisting primarily of expenditures
related to equipment, store fixtures, signage and the installation of the
Company's store-level information systems in the Trak West stores. Approximately
$3.7 million of such capital expenditures were incurred during the fourth
quarter of fiscal 1997 and the balance will be incurred during first quarter of
fiscal 1998.
Effect of the Acquisition and Financings
As a result of the Acquisition and Financings, the Company incurred
approximately $12.5 million in fees and charges which were expensed in the
fourth quarter of 1996 when the Acquisition and Financings were consummated.
Such expenses were comprised of advisory and financing fees and expenses of
approximately
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15
$11.5 million and an accrual for financing fees to an affiliate of Carmel of
$1.0 million, which was paid in April 1998.
In addition, the Company became obligated to certain members of its
management in the amount of approximately $19.9 million under its then existing
equity participation agreements. The Company expensed this full amount plus a
provision for estimated payroll taxes thereon during the fourth quarter of
fiscal 1996 when the Acquisition and Financings were consummated and paid $9.9
million (approximately 50% of the total obligation) with proceeds from the
Financings. The Company paid the remaining balance in November 1997, and Carmel
reimbursed the Company for approximately 60% (the estimated after tax cost to
the Company) of the amount of such final payment. Such reimbursement was
recorded as a contribution of capital.
There was no change to the Company's historical carrying value of assets
and liabilities as a result of the Acquisition and Financings, as purchase
accounting was not applicable.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data for the
Company expressed as a percentage of net sales for the fiscal years indicated:
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
Net sales................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 55.4 58.4 60.4
----- ----- -----
Gross profit............................................ 44.6 41.6 39.6
Operating and administrative expenses..................... 38.6 37.6 39.2
Store closing costs....................................... 0.2 1.9 0.4
Transition and integration expenses....................... 0.4 -- --
Stock-based compensation.................................. 0.1 -- --
Acquisition charge -- equity participation agreements..... -- 2.5 --
----- ----- -----
Operating profit (loss)................................. 5.3 (0.4) 0.0
Acquisition fees.......................................... 0.1 1.6 --
Interest expense.......................................... 4.8 2.6 2.0
Income tax expense (benefit).............................. 0.1 (1.5) (0.7)
----- ----- -----
Income (loss) before extraordinary item................... 0.3 (3.1) (1.3)
Extraordinary loss, net of income taxes................... 0.4 -- --
----- ----- -----
Net loss.................................................. (0.1)% (3.1)% (1.3)%
===== ===== =====
Gross profit consists primarily of net sales less the cost of sales and
warehouse and distribution expenses. Gross profit as a percentage of net sales
may be affected by variations in the Company's product mix, price changes in
response to competitive factors and fluctuations in merchandise costs and vendor
programs.
Operating and administrative expenses are comprised of store payroll, store
occupancy, advertising expenses, other store expenses and general and
administrative expenses, including salaries and related benefits of corporate
employees, administrative office occupancy expenses, data processing,
professional expenses and other related expenses.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 increased $52.7 million, or 7%, over net sales
for fiscal 1996. Comparable store sales increased $29.9 million, or 4%, and new
stores contributed $22.2 million to the increase in net sales for the fiscal
year. The former Trak West stores, which were acquired on December 8, 1997,
produced $10.6 million in net sales during the seven week period of fiscal 1997
that they were owned by the Company, which
14
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is included in the $22.2 million of new store sales for fiscal 1997. During
fiscal 1997, the Company opened 65 new stores, relocated 36 stores to larger
facilities, expanded 3 stores at their existing locations, sold 4 stores, closed
5 stores in addition to those closed due to relocations and acquired 82 stores.
At February 1, 1998, the Company had 718 stores in operation.
Gross profit for fiscal 1997 was $377.6 million, or 44.6% of net sales,
compared to $329.7 million, or 41.6% of net sales, for fiscal 1996. The increase
in gross profit percentage resulted from the Company's ability to obtain
generally better pricing and more favorable terms from its vendors as a result
of the Company's improving operating results and financial condition. In
addition, the Company has realized an increase in sales of automotive
replacement parts which produce a higher gross profit percentage than other
product categories. Gross profit percentage was also favorably affected by
efficiencies produced by the Company's warehousing and distribution systems.
Operating and administrative expenses increased by $28.2 million to $326.2
million, or 38.6% of net sales, for fiscal 1997 from $298.0 million, or 37.6% of
net sales, for fiscal 1996. The increase in this expense as a percentage of net
sales is primarily the result of the incremental operating costs of new stores
that are in the early stages of maturation. In addition, the Company incurred
increased advertising costs of approximately $1.9 million in fiscal 1997 as a
result of a shift in the mix of its advertising media from primarily print to a
greater usage of radio and television. Also, the Company incurred approximately
$0.9 million of stock based compensation expense in fiscal 1997 as the result of
the sale of stock to certain members of management at a discount to its fair
market value.
Operating profit increased to $45.5 million, or 5.3% of net sales, for
fiscal 1997, compared to an operating loss of $3.4 million, or 0.4% of net
sales, for fiscal 1996. Significant items that affect the comparability of these
operating results include: $1.6 million of store closing costs in fiscal 1997
compared to $14.9 million of store closing costs in fiscal 1996; $3.4 million of
transition and integration expense in fiscal 1997 associated with the Trak West
Acquisition with no such expense occurring in fiscal 1996; and $20.2 million of
Acquisition charges in fiscal 1996 in connection with certain equity
participation agreements with no such charges occurring in fiscal 1997. The 1996
store closing cost includes a charge of $12.9 million to reflect the store
closing costs of 91 specific store sites that were included in an update of the
Company's strategic plan for store relocation and expansion as more fully
discussed later herein.
Interest expense for fiscal 1997 totaled $40.7 million, compared to $20.7
million for fiscal 1996. The increase is the result of the issuance on October
30, 1996 of $125.0 million of 11% Senior Subordinated Notes due 2006, and $50.0
million of 12% Subordinated Notes due 2008, and increased borrowings under the
Company's Senior Credit Facility.
Income tax expense totaled $1.6 million in fiscal 1997, an effective tax
rate of 41%, compared to an income tax benefit of $11.9 million for fiscal 1996.
An extraordinary loss of $3.0 million, net of income taxes, was incurred in
fiscal 1997 as the result of the write-off of the deferred financing costs
associated with the Company's Senior Credit Facility. Such write-off was
incurred in connection with the amendment and restatement of the facility, which
is more fully discussed herein. See "Liquidity and Capital Resources."
As a result of the above factors, net loss decreased to $0.8 million for
fiscal 1997, compared to a net loss of $24.7 million for fiscal 1996.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased by $19.7 million to $70.2 million for fiscal 1997, compared to $50.5
million for fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for fiscal 1996 increased by $74.7 million, or 10.4%, over net
sales for fiscal 1995. This increase was due to an increase in comparable store
sales of 6%, or $42.5 million, and an increase in net sales from new stores of
$32.2 million. The Company believes its comparable store sales have benefited
from the installation of its new store-level information systems, implementation
of its Commercial Sales Program, its store
15
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relocation program and its expanded Priority Parts operation. During fiscal
1996, the Company opened 19 new stores, relocated 37 stores to larger
facilities, expanded eight stores at existing locations and closed five stores
in addition to relocations.
Gross profit for fiscal 1996 was $329.7 million, or 41.6% of net sales,
compared with $284.5 million, or 39.6% of net sales, during fiscal 1995. The
increase in gross profit percentage resulted from an increase in the sales of
automotive replacement parts which produce a higher gross profit percentage than
other product categories. Gross profit was also favorably impacted due to
efficiencies gained from the Company's new warehouse and distribution systems
which became fully operational in the fourth quarter of fiscal 1995. The Company
believes that it was able to obtain better pricing from its vendors as a result
of improvement in its financial performance and access to credit during fiscal
1996. These favorable factors were slightly offset in fiscal 1996 by the lower
gross margins on commercial sales as compared to retail sales.
Operating and administrative expenses for fiscal 1996 increased by $16.6
million over such expenses for fiscal 1995 but, as a percentage of net sales,
decreased to 37.6% from 39.2%. This decrease reflects the Company's ability to
leverage its overhead and fixed expenses with higher sales volume despite an
increase of approximately $3.0 million in depreciation and amortization expense
associated with the equipment installed as part of its investment in store-based
information systems.
In January 1997, the Company updated its strategic plan relating to the
relocation of certain stores. The Acquisition and Financings provided the
Company with greater access to capital resources and the availability of a
sale-leaseback facility, and thereby enhanced the Company's ability to implement
such relocations. While the Company believes that there will be long-term
operating benefits from its store relocation strategy, the Company will incur
costs for early lease terminations or negative sub-lease rentals for stores
vacated under this plan and, accordingly, a charge to earnings of $12.9 million
was recorded in January 1997 to increase the provision for store closing costs
to $14.9 million for fiscal 1996 from $3.3 million for fiscal 1995.
The $12.9 million charge reflects store closing costs associated with 91
specific store sites included in the strategic plan. The store sites have been
selected for relocation on the basis of their operating performance relative to
their size. The Company has selected these stores for relocation because of
their inability to realize future sales growth because of their relatively small
size. Stores have been included in the plan for relocation because a larger, or
otherwise more favorable, site within its market area has been identified.
Stores are scheduled to be closed at specific dates under the plan consistent
with the commencement of operations of the new store. The Company has
historically experienced sales growth shortly after opening the relocated
stores.
The $12.9 million charge consists principally of future lease costs under
non-cancellable leases for the 91 specifically identified store locations (from
the planned vacancy date), related estimates for vacancy periods, writeoffs of
certain fixed assets and leasehold improvements, and estimated credit losses
with respect to sub-lease arrangements. Significant changes to the strategic
plan are not considered likely, as all relocations are anticipated to be
completed within 18 months of the plan's adoption. Future rents will be incurred
through the expiration of the non-cancellable leases, which range from August
1998 to May 2008.
To recognize all of the Company's obligations under certain pre-existing
equity participation agreements with members of management which arose due to
the Acquisition and Financings, the Company recorded a charge of approximately
$20.2 million in the fourth quarter of fiscal 1996. See Note 2 to Item 8.
Consolidated Financial Statements. In addition, the Company incurred
non-recurring Acquisition and Financings expenses totaling $12.5 million which
consisted primarily of consulting, legal and accounting fees.
Interest expense for fiscal 1996 was $20.7 million compared to $14.4
million for fiscal 1995. The increase in interest expense was the result of
higher average effective interest rates and the issuance of approximately $181.9
million of new debt in connection with the Acquisition and Financings.
As a result of the above factors, a net loss of $24.7 million was recorded
for fiscal 1996 as compared to a net loss of $9.1 million for fiscal 1995.
EBITDA for fiscal 1996 increased by $34.4 million to $50.5 million compared
to $16.1 million for fiscal 1995.
16
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements include working capital (primarily
inventory), debt service obligations and store fixtures and leasehold
improvements associated with its store growth strategy. The Company intends to
finance such requirements with cash flow from operations, funds from a recently
established leasing facility and borrowings under its revolving credit facility,
which provides total borrowing capacity of $125.0 million, of which $60.0
million was available as of February 1, 1998. On November 18, 1997, the Company
reached an agreement with an unrelated third party for the establishment of a
$125.0 million leasing facility that will provide financing for the acquisition
and development of approximately 100 to 125 new stores over the period from
February 1, 1998 through May 31, 1999. The Company believes that cash flow from
operations combined with the availability of funds under the recently
established leasing facility and the revolving credit facility will be
sufficient to support its operations and liquidity requirements for the
foreseeable future.
On December 8, 1997, in connection with the consummation of the Trak West
Acquisition, Auto amended and restated the Senior Credit Facility to provide
maximum borrowings of $300.0 million, subject to the limitations on the
incurrence of indebtedness under the indenture governing the 11% Senior
Subordinated Notes. As amended and restated, the Senior Credit Facility provides
for a $175.0 million term loan and a revolving credit facility with maximum
borrowings of $125.0 million. In addition to increasing the term loan and
revolving credit facility availability by $75.5 million and $25.0 million,
respectively, the amendment and restatement primarily provided for: (i) an
initial reduction in the interest rate for the term loan and the revolving
credit facility and the introduction of a pricing grid which periodically
permits adjustment based upon Auto's degree of leverage; (ii) the elimination of
the previous borrowing base restrictions on revolving credit borrowings; (iii)
capital expenditure "baskets" for the Trak West Acquisition and for up to $50.0
million of other acquisitions, subject to pro forma compliance with financial
covenants; and (iv) a $50.0 million revolving capital expenditure "basket" of
funds that can be used by Auto to finance store purchase and development
activities. The term loan portion of the Senior Credit Facility matures on
October 31, 2003 and the revolving credit portion matures on October 31, 2001.
In fiscal 1997, net cash used in operating activities was $62.7 million,
which consisted primarily of $0.8 million of net loss, $22.4 million of non-cash
depreciation and amortization expenses, a $3.0 million non-cash extraordinary
loss and a $1.6 million decrease in deferred tax assets, offset by a $88.9
million increase in working capital. During this period, the Company used $63.8
million of cash to increase inventory levels, primarily for funding new store
openings and for expanding the offering of replacement parts SKUs in its stores.
Net cash used in investing activities totaled $56.7 million and consisted
primarily of $34.5 million with respect to the Trak West Acquisition and $20.1
million of capital expenditures. Net cash provided by financing activities
totaled $119.1 million and consisted primarily of net borrowings under the
Senior Credit Facility and $21.7 million of contributions from the Company. At
February 1, 1998, the Company had approximately $25.8 million of net operating
loss carryforwards available which will reduce future cash requirements for the
payment of federal income taxes.
In fiscal 1996, net cash used by operating activities was $38.4 million,
which consisted primarily of a $24.7 million net loss, an $11.9 million increase
in deferred tax assets and a $33.0 million increase in working capital,
partially offset by non-cash expenses of $20.7 million for depreciation and
amortization and $10.5 million for store closing costs. Net cash used for
investing activities was $10.7 million and was comprised of $6.3 million of
funds used for capital expenditures and a net $4.4 million of purchases in
excess of proceeds for assets held for sale. Net cash provided by financing
activities was $49.9 million and was primarily the result of the Acquisition and
Financings.
17
19
On March 17, 1998, the Company completed an initial public offering of
approximately 8.6 million shares of its common stock. The Offering generated net
proceeds of approximately $159.1 million which were used to reduce outstanding
debt of the Company, as follows, (in millions):
12% Subordinated Notes...................................... $ 50.0
11% Senior Subordinated Notes............................... 43.8
Senior Credit Facility...................................... 53.8
Premiums on retirement...................................... 4.9
Accrued interest............................................ 6.6
------
$159.1
======
Upon the retirement of the Company's 12% Subordinated Notes, all of Auto's
outstanding preferred stock was cancelled.
YEAR 2000 CONVERSION
The Company uses one Hitachi Data System EX33 Mainframe, four IBM AS/400's
("AS/400") and over 400 personal computers which are connected to a local area
network. A satellite communications network provides the connectivity from the
centralized Company database to the stores.
The Company's store-based information systems are on a UNIX based platform
with full connectivity between the EPC and the POS systems. This includes
electronic ordering from the EPC via the corporate office AS/400 to the
Company's Priority Parts depots, third-party warehouse distributors and directly
to vendors.
Based on a recent assessment, the Company determined that it will be
required to modify or replace certain portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999 (the "Year
2000 Conversion"). The Company presently believes that with modifications to
existing software and conversions to new software, the cost of its Year 2000
Conversion can be mitigated. However, if such modifications and conversions are
not made, or are not completed in a timely manner, the failure of its Year 2000
Conversion could have a material adverse effect on the operations of the
Company.
The Company has initiated formal communications with all of its significant
business partners to determine the extent to which the Company is exposed to
failure by those third parties to remediate their own Year 2000 Conversion
issues. The Company's total Year 2000 Conversion project cost and its estimates
to complete necessary actions include the estimated costs and time associated
with the impact of its business partners' Year 2000 Conversion issues and are
based on information presently available. There can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company does not believe that it has a material
contingency related to its Year 2000 Conversion for the products it has sold.
The Company will utilize both internal and external resources to reprogram,
replace and test its software for its Year 2000 Conversion. The Company plans to
complete its Year 2000 Conversion not later than June 30, 1999. The total
remaining cost of its Year 2000 Conversion is estimated at $8.9 million and is
being funded with lease financing and operating cash flows. Of the total project
cost, approximately $6.7 million is attributable to the purchase of new software
which will be capitalized. The remaining $2.2 million will be expensed as
incurred over the next two fiscal years. To date, the Company has incurred and
expensed approximately $0.3 million related to the assessment of and preliminary
efforts in connection with its Year 2000 Conversion project. To date,
approximately $1.0 million has been capitalized in connection with the
replacement of certain software applications.
The costs of the Year 2000 Conversion and the date on which the Company
plans to complete the project are based upon management's best estimates, which
were derived utilizing numerous assumptions of future events. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that could cause such material
differences include, but are not
18
20
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
NEW ACCOUNTING STANDARDS
During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure," which
had no effect on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." In February 1998, the FASB issued No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits." The Company will adopt these
statements during fiscal 1998. As these statements only require additional
disclosures in the Company's financial statements, their adoption will not have
any effect on the Company's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1,"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use". The SOP defines the characteristics of internal-use computer
software criteria for capitalization, and financial statement disclosure
requirements. The SOP is effective for fiscal years beginning after December 15,
1998, with earlier application encouraged. The Company is in the process of
evaluating the impact of early adoption of SOP 98-1 upon its financial position
and results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Cost of Start-up Activities." The SOP broadly defines start-up
activities as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory, or
commencing some new operation. The SOP requires that the costs of start-up
activities be expensed as incurred and is effective for financial statements for
fiscal years beginning after December 15, 1998, with earlier application
encouraged. The Company's current accounting policy with respect to the cost of
start-up activities is to defer such costs for the approximately three month
period of time that it takes to develop a new store facility and to expense such
costs during the month that the new store opens. The Company is in the process
of evaluating the impact of early adoption of SOP 98-5 upon its financial
position and results of operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
19
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CSK Auto Corporation and subsidiaries
We have audited the accompanying consolidated balance sheets of CSK Auto
Corporation and subsidiaries (the "Company") as of February 1, 1998 and February
2, 1997 and the related consolidated statement of operations, stockholders'
equity, cash flows and financial statement schedules for the years then ended as
listed in item 14(a-2) of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CSK Auto
Corporation and subsidiaries as of February 1, 1998 and February 2, 1997, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
April 10, 1998
20
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CSK Auto Corporation
In our opinion, the accompanying consolidated statements of operations, of
stockholders' equity (deficit) and of cash flows for the year ended January 28,
1996 present fairly, in all material respects, the financial position of CSK
Auto Corporation and its subsidiaries for the year ended January 28, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of CSK Auto
Corporation for any period subsequent to January 28, 1996.
PRICE WATERHOUSE LLP
Phoenix, Arizona
December 23, 1997
21
23
CSK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales............................................ $ 845,815 $ 793,092 $ 718,352
Cost and expenses:
Cost of sales...................................... 468,171 463,374 433,817
Operating and administrative....................... 326,198 298,004 281,387
Store closing costs................................ 1,640 14,904 3,310
Transition and integration expenses................ 3,407 -- --
Stock-based compensation........................... 909 -- --
Acquisition charge -- equity participation
agreements...................................... -- 20,174 --
----------- ----------- ----------
800,325 796,456 718,514
----------- ----------- ----------
Operating profit (loss).............................. 45,490 (3,364) (162)
Other Acquisition and Financings fees................ 1,009 12,463 --
Interest expense..................................... 40,680 20,691 14,379
----------- ----------- ----------
Income (loss) before income taxes and extraordinary
item............................................... 3,801 (36,518) (14,541)
Income tax expense (benefit)......................... 1,557 (11,859) (5,447)
----------- ----------- ----------
Income (loss) before extraordinary item.............. 2,244 (24,659) (9,094)
Extraordinary loss, net of $2,091of income taxes..... (3,015) -- --
----------- ----------- ----------
Net loss............................................. $ (771) $ (24,659) $ (9,094)
=========== =========== ==========
Basic earnings per share:
Income (loss) before extraordinary item.............. $ 0.13 $ (2.28) $ (1.04)
Extraordinary loss, net of income taxes.............. (0.17) -- --
----------- ----------- ----------
Net loss............................................. $ (0.04) $ (2.28) $ (1.04)
=========== =========== ==========
Shares used in computing per share amounts........... 17,400,214 10,818,913 8,723,550
=========== =========== ==========
Diluted earnings per share:
Income (loss) before extraordinary item.............. $ 0.12 $ (2.28) $ (1.04)
Extraordinary loss, net of income taxes.............. (0.16) -- --
----------- ----------- ----------
Net loss............................................. $ (0.04) $ (2.28) $ (1.04)
=========== =========== ==========
Shares used in computing per share amounts........... 18,011,666 10,818,913 8,723,550
=========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
22
24
CSK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 1, FEBRUARY 2,
1998 1997
------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents................................... $ 4,852 $ 5,223
Receivables, net of allowances of $2,403 and $1,768,
respectively.............................................. 37,566 28,511
Inventories................................................. 367,366 268,214
Assets held for sale........................................ 2,418 5,971
Prepaid expenses and other current assets................... 14,143 10,139
--------- ---------
Total current assets.............................. 426,345 318,058
--------- ---------
Property and equipment, net................................. 85,940 71,363
Leasehold interests, net.................................... 10,934 12,683
Deferred income taxes....................................... 22,021 18,615
Other assets, net........................................... 18,011 23,267
--------- ---------
Total assets...................................... $ 563,251 $ 443,986
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable............................................ $ 109,962 $ 120,998
Outstanding checks.......................................... 4,308 7,004
Accrued payroll and related expenses........................ 20,869 15,851
Accrued expenses and other current liabilities.............. 40,818 44,444
Due to affiliates........................................... 1,000 --
Current maturities of amounts due under Senior Credit
Facility.................................................. 1,000 1,000
Current maturities of capital lease obligations............. 8,671 7,007
Deferred income taxes....................................... 4,066 597
--------- ---------
Total current liabilities......................... 190,694 196,901
--------- ---------
Amounts due under Senior Credit Facility.................... 239,050 137,000
Obligations under 11% Senior Subordinated Notes............. 125,000 125,000
Obligations under 12% Subordinated Notes.................... 50,000 50,000
Obligations under capital leases............................ 16,241 15,673
Due to affiliates........................................... -- 1,000
Other....................................................... 17,321 20,675
--------- ---------
Total non-current liabilities..................... 447,612 349,348
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.01 par value, 41,666,752 shares authorized,
19,113,388 at February 1, 1998 and 17,105,000 shares at
February 2, 1997 issued and outstanding................... 191 171
Additional paid-in capital.................................. 130,513 106,677
Stockholder receivable...................................... (1,168) (5,966)
Deferred compensation....................................... (675) --
Accumulated deficit......................................... (203,916) (203,145)
--------- ---------
Total stockholders' deficit....................... (75,055) (102,263)
--------- ---------
Total liabilities and stockholders' deficit....... $ 563,251 $ 443,986
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
23
25
CSK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED STOCKHOLDER DEFERRED TOTAL EQUITY
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE COMPENSATION (DEFICIT)
---------- ------ ---------- ----------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at January 29, 1995......... 100 $ -- $ 81,680 $ (12,589) $ -- $ -- $ 69,091
Net loss............................ (9,094) (9,094)
---------- ---- -------- --------- ------- ----- ---------
Balance at January 28, 1996......... 100 -- 81,680 (21,683) -- -- 59,997
Conversion of common stock into
Class A, Class C, Class D, and
Class F stock..................... 8,723,550 87 (87) -- -- -- --
Redemption of Class F stock......... (100) -- (81,675) (156,803) -- -- (238,478)
Issuance of Class E stock........... 8,381,450 84 100,793 -- -- -- 100,877
Stockholder receivable.............. -- -- 5,966 -- (5,966) -- --
Net loss............................ -- -- -- (24,659) -- -- (24,659)
---------- ---- -------- --------- ------- ----- ---------
Balance at February 2, 1997......... 17,105,000 171 106,677 (203,145) (5,966) -- (102,263)
Recovery of stockholder
receivable........................ -- -- -- -- 5,966 -- 5,966
Sale of Class B shares.............. 180,600 2 2,172 -- (1,168) -- 1,006
Sale of shares -- Trak West
Acquisition....................... 1,827,788 18 20,989 -- -- -- 21,007
Deferred compensation............... -- -- 675 -- -- (675) --
Net loss............................ -- -- -- (771) -- -- (771)
---------- ---- -------- --------- ------- ----- ---------
Balance at February 1, 1998......... 19,113,388 $191 $130,513 $(203,916) $(1,168) $(675) $ (75,055)
========== ==== ======== ========= ======= ===== =========
The accompanying notes are an integral part of these consolidated financial
statements.
24
26
CSK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
Cash flows provided by (used in) operating activities:
Net loss.................................................. $ (771) $ (24,659) $ (9,094)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and
equipment............................................ 18,078 17,290 14,343
Amortization of leasehold interests.................... 1,176 1,749 1,647
Amortization of other deferred charges................. 1,113 186 271
Amortization of deferred financing costs............... 2,043 1,504 737
Extraordinary loss on early retirement of debt, net.... 3,015 -- --
Deferred income taxes.................................. 1,557 (11,859) (5,448)
Change in operating assets and liabilities, net of
effects
of Trak West Acquisition:
Accounts receivable.................................. (9,055) (3,063) (7,057)
Inventories.......................................... (63,830) (19,250) (23,081)
Prepaid expenses and other current assets............ (4,057) (5,316) 542
Accounts payable..................................... (11,036) (24,250) 14,170
Outstanding checks................................... (2,696) (1,457) 8,461
Accrued payroll, accrued expenses and other current
liabilities....................................... 2,021 18,576 (496)
Due to affiliate..................................... -- (4,530) 5,530
Store closing costs.................................. (3,781) 10,544 (447)
Other................................................ 3,520 6,169 1,276
--------- --------- ---------
Net cash provided by (used in) operating activities.... (62,703) (38,366) 1,354
--------- --------- ---------
Cash flows used in investing activities:
Capital expenditures...................................... (20,132) (6,317) (11,640)
Expenditures for assets held for sale..................... (12,335) (19,023) (24,203)
Proceeds from sale of property and equipment and assets
held for sale.......................................... 10,966 14,667 28,257
Acquisition of the Trak West stores....................... (34,504) -- --
Other investing activities................................ (722) (13) (302)
--------- --------- ---------
Net cash used in investing activities..................... (56,727) (10,686) (7,888)
--------- --------- ---------
Cash flows provided by financing activities:
Borrowings under Senior Credit Facility................... 325,550 805,242 809,663
Payments of debt.......................................... (223,500) (763,304) (795,807)
Issuance of 11% Senior Subordinated Notes................. -- 125,000 --
Issuance of 12% Subordinated Notes........................ -- 50,000 --
Payments on capital lease obligations..................... (7,478) (5,888) (4,976)
Redemption of Class F stock............................... -- (238,468) --
Issuance of Class E stock................................. 100,882 --
Issuance of Class B stock................................. 21,714
Recovery of stockholder receivable........................ 5,966 -- --
Note issuance costs....................................... -- (18,632) --
Other..................................................... (3,193) (4,921) (852)
--------- --------- ---------
Net cash provided by financing activities................... 119,059 49,911 8,028
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (371) 859 1,494
Cash and cash equivalents, beginning of period.............. 5,223 4,364 2,870
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 4,852 $ 5,223 $ 4,364
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
25
27
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CSK Auto Corporation is a holding company. At February 1, 1998, CSK Auto
Corporation had no business activity other than its investment in CSK Auto,
Inc., a wholly-owned subsidiary ("Auto"). On a consolidated basis, CSK Auto
Corporation and subsidiaries are referred to herein as "the Company".
CSK Auto, Inc. is a specialty retailer of automotive aftermarket parts and
accessories. At February 1, 1998, the Company operated 718 stores in 12 Western
states as a fully integrated company under three brand names: Checker Auto
Parts, founded in 1968 and operating in the Southwestern and Rocky Mountain
states; Schuck's Auto Supply, founded in 1917 and operating in the Pacific
Northwest; and Kragen Auto Parts, founded in 1947 and operating primarily in
California.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of CSK Auto
Corporation, Auto and Auto's wholly-owned subsidiaries Schuck's Distribution Co.
and Kragen Auto Supply Co. for all years presented. In addition, the accounts of
TRK Socal, Inc. (the former Trak West stores) are included from December 9, 1997
through February 1, 1998. During the fiscal year ended January 28, 1996, the
consolidated financial statements include the accounts of certain former
subsidiaries of CSK Auto Corporation. Such subsidiaries were inactive and were
sold or liquidated during the fiscal year ended January 28, 1996. All
intercompany accounts and transactions are eliminated in consolidation. On April
8, 1998, Schuck's Distribution Co., Kragen Auto Supply Co. and TRK Socal, Inc.
were merged into Auto.
Fiscal Year
The Company's fiscal year-end is on the Sunday nearest to January 31 of the
following calendar year. The years ended February 1, 1998 (fiscal "1997") and
January 28, 1996 (fiscal "1995") consisted of 52 weeks, while the year ended
February 2, 1997 (fiscal "1996") consisted of 53 weeks.
Cash Equivalents
Cash equivalents consist primarily of certificates of deposit with
maturities of three months or less when purchased.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and trade receivables. As of February 1, 1998, the Company had cash and cash
equivalents on deposit with a major financial institution which were in excess
of FDIC insured limits. Historically, the Company has not experienced any losses
of its cash and cash equivalents due to such concentration of credit risk.
The Company does not hold collateral to secure payment of its trade
accounts receivable. However, management performs ongoing credit evaluations of
its customers' financial condition and provides an allowance for estimated
potential losses. Exposure to credit loss is limited to the carrying amount.
Accounts receivable is primarily comprised of amounts due from vendors for
rebates or allowances and from commercial sales customers.
Inventories and Cost of Sales
Inventories are valued at the lower of cost or market, cost being
determined utilizing the last-in, first-out method. Cost of sales includes
product cost, net of earned vendor rebates, discounts and allowances. The
Company recognizes vendor rebates, discounts and allowances based on the terms
of the underlying agreements. Such amounts may be recognized immediately,
amortized over the life of the applicable
26
28
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
agreements, or recognized as inventory is sold. Certain operating and
administrative costs are capitalized in inventories. The amounts of capitalized
operating and administrative costs included in inventory as of February 1, 1998
and February 2, 1997 were approximately $11.8 million and $9.7 million,
respectively. The replacement cost of inventories approximated $316.2 million at
February 1, 1998 and $225.6 million at February 2, 1997.
Property and Equipment
Property, equipment and purchased software are recorded at cost.
Depreciation and amortization are computed for financial reporting purposes
utilizing primarily the straight line method over the estimated useful lives of
the related assets which range from 5 to 25 years, or for leasehold improvements
and property under capital lease, the base lease term or estimated useful life,
if shorter. Maintenance and repairs are charged to earnings when incurred.
Store Preopening Costs
Store preopening costs, consisting primarily of incremental labor, supplies
and occupancy costs directly related to the opening of specific stores, are
capitalized as prepaid expenses and other current assets and expensed during the
month in which the store is opened.
Internal Software Development Costs
Internal software development costs, consisting primarily of incremental
internal labor costs and benefits, are expensed as incurred. Total amounts
charged to operations for fiscal years 1997, 1996 and 1995 were approximately
$1.3 million, $1.5 million and $6.2 million, respectively.
Leasehold Interests
Leasehold interests represent the discounted net present value of the
excess of the fair rental value over the respective contractual rent of
facilities under operating leases acquired in business combinations.
Amortization expense is computed on a straight-line basis over the respective
lease terms. Accumulated amortization totaled $16.2 million and $16.3 million at
February 1, 1998 and February 2, 1997, respectively.
Store Closing Costs
The company provides an allowance for estimated costs and losses to be
incurred in connection with store closures and losses on the disposal of
store-related assets, which is net of anticipated sublease income. See Note 12.
Advertising
The Company expenses all advertising costs as such costs are incurred.
Amounts due under vendor cooperative advertising agreements are recorded as
receivables until their collection. Advertising expense for fiscal years 1997,
1996 and 1995 totaled approximately $23.7 million, $21.8 million and $19.8
million, respectively.
Assets Held for Sale
Assets held for sale consist of newly acquired land, buildings and store
fixtures owned by the Company which the Company intends in the next twelve
months to sell to and lease back from third parties under operating lease
arrangements.
27
29
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Long-lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
("SFAS 121"), issued in March 1995 and effective for fiscal years beginning
after December 15, 1995, requires recognition of impairment losses whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company evaluates the carrying value of long-lived
assets under the provisions of SFAS 121 on a quarterly basis. Based upon such
evaluations, no impairment loss has been recognized in the accompanying
consolidated financial statements.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities ("temporary
differences") and their financial reporting amounts at each year end based on
enacted tax laws and statutory rates applicable to the period in which the
temporary differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations thereof. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. See Note 9.
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued statement
of Financial Accounting Standards No. 128, Earnings per Share ("FAS 128). FAS
128 establishes standards for computing and presenting earnings per share
("EPS") and supercedes APB Opinion No. 15, Earnings per Share ("APB 15"). FAS
128 replaces the presentation of primary EPS with a presentation of basic EPS
which excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average of common shares outstanding during the
period. This statement also requires dual presentation of basic EPS and diluted
EPS on the face of the income statement for all periods presented. Diluted EPS
is calculated similarly to fully diluted EPS pursuant to APB 15, with some
modifications. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Early adoption is not
permitted and the statement requires restatement of all prior-period EPS data
presented after the effective date. Consequently, the Company has adopted and
implemented FAS 128 effective as of fiscal 1997 and has restated all prior
period EPS data presented within these financial statements.
28
30
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Calculation of shares used in computing per share amounts under the
provisions of SFAS 128 and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 is summarized as follows:
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
Common stock outstanding:
Beginning of year............................. 17,105,000 8,723,550 8,723,550
End of year............................