Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999.
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, 85012
ARIZONA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 13, 1999, the aggregate market value of the Company's common
stock held by non-affiliates was approximately $405.6 million. For purposes of
the above statement only, all directors and executive officers of the registrant
are assumed to be affiliates. As of April 13, 1999, there were 27,784,834 shares
of the Company's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following public filings are incorporated by reference into this Report
on Form 10-K:
- Portions of the Company's Registration Statement on Form S-1 (File No.
333-43211) are incorporated by reference into Part IV of this Form 10-K.
- Portions of the Company's Registration Statement on Form S-1 (File No.
333-67231) are incorporated by reference into Part IV of this Form 10-K.
- Portions of the Company's definitive Proxy Statement on Schedule 14A,
with respect to the Company's 1999 Annual Meeting of Stockholders, are
incorporated by reference into Part III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 13
Item 6. Selected Consolidated Financial Data........................ 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 24
Item 8. Consolidated Financial Statements and Supplementary Data.... 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 50
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 50
Item 11. Executive Compensation...................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 50
Item 13. Certain Relationships and Related Transactions.............. 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 50
NOTE CONCERNING FORWARD-LOOKING INFORMATION
Some of the information in this Report on Form 10-K contains
forward-looking statements that involve substantial risks and uncertainties. You
can identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they: (1)
discuss our future expectations; (2) contain projections of our future results
of operations or of our financial condition; or (3) state other
"forward-looking" information. We believe that it is important to communicate
our future expectations to our investors. However, there may be events in the
future that we are not able to accurately predict or over which we have no
control, the occurrence of which could have a material adverse effect on our
business, operating results and financial condition. These events may include
future operating results, our efforts to address Year 2000 issues and potential
competition, among other things. 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.
1
3
PART I
ITEM 1. BUSINESS
GENERAL
We are the largest retailer of automotive parts and accessories in the
Western United States and one of the largest retailers of such products in the
United States based, in each case, on our number of stores. As of January 31,
1999, we operated 807 stores as one fully integrated company under three brand
names:
- Checker Auto Parts, founded in 1969 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.
We offer a broad selection of national brand name and private label
automotive products for domestic and imported cars, vans and light trucks. Our
products include new and remanufactured automotive replacement parts,
maintenance items and accessories. Most of our sales are to do-it-yourself
customers, although our commercial sales program focusing on sales to auto
repair professionals and fleet owners represents a significant and increasing
part of our business. Our stores typically offer between 13,000 and 17,000
stock-keeping units, or SKUs. Our operating strategy is to offer our products at
everyday low prices and at conveniently located and attractively designed
stores, supported by highly trained, efficient and courteous customer service
personnel. We do not sell tires or perform automotive repairs.
AUTOMOTIVE AFTERMARKET INDUSTRY
We are a retailer of aftermarket automotive products such as replacement
parts, maintenance items and accessories. The term aftermarket distinguishes our
sales from those items sold as part of the original sale of a car or truck. We
believe that the automotive aftermarket for these items is growing because of
increases in:
- The size and age of the country's automotive fleet;
- The number of miles driven annually per vehicle;
- The purchase prices of new cars;
- The cost of replacement parts; and
- Labor costs associated with parts, installation and maintenance.
There are many companies selling automotive aftermarket products. We
believe, however, that the industry is consolidating as national and regional
specialty retail chains gain market share at the expense of smaller independent
retailers and less specialized mass merchandisers. Automotive specialty
retailing chains like ours, which have multiple locations in a given market
area, enjoy competitive advantages in purchasing, distribution, advertising and
marketing compared to most small independent retailers. In addition, the recent
significant increase in the variety of domestic and imported vehicle makes and
models has increased the number of automotive replacement parts. This makes it
difficult for smaller independent retailers and less specialized mass
merchandise chains to maintain inventory selection broad enough to meet customer
demands. We believe this has created a competitive advantage for us and for
other automotive specialty retailing chains that have the distribution capacity
and sophisticated information systems to stock and deliver a large number of
products in a timely manner.
MARKETING AND MERCHANDISING STRATEGY
Our 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. We offer these products at conveniently located and
attractively designed stores, staffed by highly trained, efficient and courteous
employees.
2
4
CUSTOMER SERVICE
We are a customer-oriented retailer dedicated primarily to do-it-yourself
consumers with a significant and increasing focus on commercial customers. We
try to enhance customer service by use of our sophisticated product distribution
and store support systems, as well as our extensive training programs.
We believe that the recruiting, training and retention of high quality
sales associates is required if our business is to be successful. We operate
training and incentive programs to encourage the development of technical
expertise by our sales associates so they can effectively advise customers on
product selection and use.
CSK University, our sales associate development program, is dedicated to
the continuous education of store associates through structured on-the-job
training and formal classroom instruction. The curriculum focuses on four areas
of the associate's development:
- Customer service skills;
- Basic automotive systems;
- Advanced automotive systems; and
- Management development.
Much of the training is delivered through formal classes in 21 training
centers that are fully equipped with the same systems as are in our stores. We
believe that our training programs enable sales associates to provide a high
level of service to a wide variety of customers ranging from less informed
do-it-yourself consumers to more sophisticated purchasers requiring diagnostic
advice. We also provide 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, we require periodic
meetings of district and store managers to facilitate and enhance communications
within our organization. Approximately 1,800 of our associates have passed the
ASE-P2 test, a nationally recognized certification for auto parts technicians.
In order to satisfy our customers, we 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. Our
significant investments in associate training and store-level information
systems enable our in-store personnel to devote more time to attending to our
customers' automotive needs.
We use our centralized database as a source to make approximately 95,000
calls annually to customers inquiring as to their overall satisfaction with our
sales associates, pricing, product selection and quality. In addition, the
results of customer satisfaction surveys are provided to each store and the
appropriate management personnel to ensure that customer service levels remain a
store focus.
PRODUCT SELECTION
Our stores have a broad selection of national brand name products in order
to generate customer traffic and appeal to our commercial customers. In
addition, we stock a large selection of high quality private label products that
appeal to value-conscious customers. Each store offers an extensive product
line, including automotive replacement parts such as starters, alternators,
shock absorbers, mufflers, brakes, spark plugs, filters and batteries, as well
as a wide variety of maintenance items, such as motor oil, lubricants, waxes,
cleaners, polishes and antifreeze. In addition, each store offers general
accessories such as car stereos, alarms, trim, floor mats, tools and seat
covers. Sales of replacement parts account for approximately 60% of our sales.
Replacement parts typically generate higher gross profit margins than
maintenance items or general accessories. We are increasing our sales of
replacement parts, as a percentage of total sales, by offering a wider selection
of replacement parts and by increasing sales to commercial customers.
3
5
PRODUCT AVAILABILITY
Our stores offer between 13,000 and 17,000 SKUs of national brand name and
private label automotive products. If a store does not carry a specific part,
store associates are able to use our surround store inventory program to record
the sale, reserve the part and direct the customer to pick it up from a store in
the same market or at one of our nearby depots.
We have continued to expand and improve our delivery system and have
increased our number of strategically located priority parts depots to 32. This
has led to better customer service by making available up to an additional
200,000 products on a same-day delivery basis to over 80% of our stores and
1,000,000 additional products on a next-day delivery basis to all of our stores.
This has also allowed us to increase sales to commercial accounts due to the
availability of a greater number of replacement parts. Our priority parts
operation handles approximately 212,000 inquiries each week. Store associates
are able to electronically inquire on price and availability and order parts
from the priority parts depots through our electronic parts catalog and receive
immediate confirmation of availability without having to make telephone
inquiries.
We have classified our product mix into 110 separate categories through a
merchandising program designed to determine the optimal inventory mix at each
individual store based on that store's historical sales. We believe that we can
improve store sales, gross profit margin and inventory turnover by tailoring
individual store inventory mix based on historical sales patterns for each of
the 110 product categories.
PRICING
Our pricing philosophy is that we should not lose a customer because of
price. Our pricing strategy is to offer everyday low prices at each of our
stores. Part of this strategy is to beat any competitor's lower price by 5%. As
a result, we closely monitor our competitors' pricing levels to ensure
competitive pricing in all of our stores. Our entry-level products offer
excellent value by meeting standard quality requirements at low prices. In
addition, our sales associates are encouraged to offer alternative products at
slightly higher price points. These products typically provide extra features,
improved performance, an enhanced warranty or are of national brand recognition.
In the third quarter of fiscal 1997, we implemented our precision pricing
program which analyzes prices at the store level rather than at the market or
chain level. This initiative enables us to establish pricing levels at each
store based upon that store's local market competition.
ADVERTISING
We support our marketing and merchandising strategy through print
advertising, in-store promotional displays and an increasing emphasis on radio
and television advertising. The print advertising consists of monthly color
circulars that are produced by our in-house advertising department and that
contain redeemable coupons. We also advertise on radio, television and
billboards primarily to reinforce our image and name recognition. Television
advertising is targeted to sports programming and radio advertising primarily is
aired during commuting hours. Advertising efforts include Spanish language
television and radio as well as bilingual store signage. In-store signs and
displays are used to promote products, identify departments, and to announce
store specials. We also sponsor a National Hot Rod Association Funny Car, a Top
Fuel Car and we have been designated the "Official Auto Parts Store of the
NHRA." We have web sites on the Internet at:
- http://www.cskauto.com;
- http://www.checkerauto.com;
- http://www.schucks.com; and
- http://www.kragen.com.
4
6
STORE-BASED INFORMATION SYSTEMS
Over the past several years, we installed several store-level information
systems, which have improved store labor productivity and customer service.
These systems are described below.
ELECTRONIC PARTS CATALOG
Our electronic parts catalog is a software-based system that identifies the
location and availability of over one and a half million parts. The electronic
parts catalog is a user-friendly tool that enables our 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 electronic parts catalog displays which part is needed
and whether it is located in the store. In the event a particular product is
unavailable at a store, the electronic parts catalog indicates whether it can be
obtained at a nearby store, priority parts depot, through certain warehouse
distributors with same-day delivery or directly from the manufacturer.
Information about the customer's car can be entered into a permanent customer
database that can be instantly accessed whenever the customer visits or phones
the store. The electronic parts catalog also displays related parts that the
sales associates can recommend to the customer for purchase and prints parts
lists for the customer. Our electronic parts catalog system is integrated with
our point of sale system and centralized database. This integration improves
customer service by:
- Reducing checkout time by fully automating the ordering process between
the parts counter and the point of sale register;
- Allowing the store associate to order parts electronically with immediate
confirmation of availability and/or delivery; and
- Providing up-to-the-minute pricing of products.
POINT OF SALE SYSTEM
We installed a point of sale system consisting of cash registers and
sophisticated software in all of our stores, which electronically record and
report customer transactions and are tied to our electronic parts catalog and
the central inventory system. This point of sale system improves store
productivity and customer service by streamlining in-store procedures and
eliminating handwritten record keeping. This system also allows for paperless
transactions and electronic updating of warranty information. In addition, the
point of sale software tracks the history of individual customer purchases for
use in regionalized marketing and merchandising programs.
RETAIL PAPERLESS MANAGEMENT SYSTEM
Our retail paperless management system is a store-based software system
used to improve store efficiency. This system provides for interactive store
associate development and testing, communication via company-wide e-mail,
knowledge-based interviewing of associate applicants, automated associate time
and attendance recording and forms automation.
LABOR SCHEDULING SYSTEM
We utilize a sophisticated labor scheduling system that allocates labor
hours based on factors including forecasted sales and customer traffic counts.
We believe this system enables us to provide superior customer service while
providing for improved labor productivity.
SATELLITE COMMUNICATIONS NETWORK
Our satellite communications network links all of our stores with our
corporate office. The satellite network enables us to efficiently obtain and
deliver to our stores all file transfers, including pricing down-loads, sales
information updates and interactive transactions such as electronic parts
ordering. The system also
5
7
broadcasts common files to all stores simultaneously to update our electronics
parts catalog. In addition, the satellite network significantly increases the
speed of credit card and check authorization.
CALL CENTER
Our centralized call center provides store personnel at selected
high-volume stores the option to reroute customer calls to a central location
during the store's busiest hours of operation. Call center associates perform
all functions that store personnel normally handle, such as store specific parts
look-up, price look-up and inventory availability verification. Associates in
the call center can take an order from a customer and electronically transmit it
to the store, so that the customer can pick up the requested product at his
local store. Use of the call center allows sales associates to give their
undivided attention to customers at the store while call-in customers are
serviced directly by call center associates.
STORE OPERATIONS
Our stores are divided into seven geographic regions: Southwest, Rocky
Mountain, Northwest, Southern California, Coastal California, Los Angeles and
Northern California. Each region is administered by a regional manager, each of
whom oversees six to nine district managers. Each of our district managers has
responsibility for between 4 and 20 stores.
The geographic distribution of our stores and the tradenames under which
they operated, as of January 31, 1999, are set forth in the table below.
SCHUCK'S CHECKER KRAGEN COMPANY
AUTO SUPPLY AUTO PARTS AUTO PARTS TOTAL
----------- ---------- ---------- -------
California.............................. 2 1 384 387
Washington.............................. 88 -- -- 88
Arizona................................. -- 86 -- 86
Colorado................................ -- 66 -- 66
Utah.................................... -- 30 -- 30
Oregon.................................. 33 -- -- 33
Texas................................... -- 26 -- 26
New Mexico.............................. -- 23 -- 23
Idaho................................... 17 6 -- 23
Nevada.................................. -- 14 7 21
Montana................................. -- 9 -- 9
Alaska.................................. 8 -- -- 8
Wyoming................................. -- 7 -- 7
--- --- --- ---
Total......................... 148 268 391 807
=== === === ===
Our stores are generally 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). The average store employs
approximately 10 to 20 employees, including a store manager, two assistant store
managers and a staff of full-time and part-time employees.
STORE FORMATS
Our stores are generally located in high visibility, high traffic strip
shopping centers or in freestanding 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 17,000
SKUs.
We have three prototype store designs which are 6,000, 7,000 and 8,000
square feet in size. The store size for a given new location is selected based
upon sales volume expectations determined through demographics
6
8
and the detailed market analysis that we prepare as part of our site selection
process. The following table categorizes our stores by size, as of January 31,
1999:
STORE SIZE NUMBER OF STORES
- ---------- ----------------
10,000 sq. ft. or greater.......................... 70
8,000-9,999 sq. ft................................. 155
6,000-7,999 sq. ft................................. 270
5,000-5,999 sq. ft................................. 196
Less than 5,000 sq. ft............................. 116
---
807
===
Approximately 61% of our stores are freestanding, with the balance
principally located within strip shopping centers. Approximately 85% to 90% of
each store's square footage is selling space, of which approximately 40% to 50%
is dedicated to automotive replacement parts inventory. The replacement parts
inventory area is fronted by a counter staffed by knowledgeable parts personnel
and is equipped with the electronic parts catalog. The remaining selling space
contains gondolas for accessories and maintenance items, including oil and air
filters, additives, waxes and other items, together with specifically designed
shelving for batteries and, in many stores, oil products.
STORE GROWTH STRATEGY
Our store growth strategy is focused on our existing markets and includes:
- Opening new stores;
- Relocating smaller stores to larger stores at better locations; and
- Expanding selected stores.
We have identified most of our stores smaller than 5,000 square feet as
future relocation or expansion priorities.
Our market strategy group, which is a part of our real estate department,
utilizes a sophisticated, market-based approach that identifies and analyzes
potential store locations based on detailed demographic and competitive studies.
These demographic and competitive studies include analysis of population
density, growth patterns, age, per capita income, vehicle traffic counts and the
number and type of existing automotive-related facilities, such as automotive
parts stores and other competitors within a pre-determined radius of the
potential new location. These potential locations are compared to our existing
locations to determine opportunities for opening new stores and relocating or
expanding existing stores.
We believe that the large number of small operators in our industry has
enabled us to effectively pursue an opportunistic acquisition strategy. We focus
our acquisition efforts in (1) existing markets to achieve further market
penetration in a timely and cost-effective manner without adding additional
retail square footage, and (2) contiguous markets to permit further leveraging
of our established infrastructure over an increasing sales base.
7
9
The following table sets forth our store development activities during the
periods indicated:
FISCAL YEAR
--------------------
1998 1997 1996
---- ---- ----
Beginning stores............................................ 718 580 566
New stores.................................................. 94 65 19
Relocated stores............................................ 31 36 37
Acquired stores............................................. 2 82 --
Closed stores (including relocated stores).................. (38) (45) (42)
--- --- ---
Ending stores............................................... 807 718 580
=== === ===
Expanded stores............................................. 5 3 8
Total new, relocated and expanded stores.................... 130 104 64
We believe that substantial growth opportunities exist in our current
markets and that our store growth strategy will increase our name recognition
and market penetration while we benefit from economies of scale in advertising,
management and distribution costs. We opened, relocated or expanded 130 stores
in fiscal 1998 as compared to 104 stores in fiscal 1997. We plan to continue to
accelerate our store growth strategy and expect to open, relocate or expand
approximately 150 stores in fiscal 1999. As of January 31, 1999, we had executed
purchase contracts or leases for 49 sites, were in various stages of negotiation
for 81 additional sites and had identified numerous potential additional sites
for store growth. New stores generally become profitable during the first year
of operation.
COMMERCIAL SALES PROGRAM
In addition to our primary focus on serving the do-it-yourself consumer, we
have significantly increased our marketing efforts to the commercial customer in
the automotive replacement parts market. The commercial market constitutes in
excess of 50% of the annual sales in the automotive aftermarket and is currently
growing at a faster rate than the do-it-yourself market. Our 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 our stores.
We have made a significant commitment to this portion of our business and
upgraded the information systems capabilities available to the commercial sales
group. In addition, we employ one district sales manager for approximately every
five stores that have a commercial sales center. A district sales manager is
responsible for servicing existing commercial accounts and developing new
commercial accounts. In addition, at a minimum each commercial sales center has
a dedicated in-store salesperson, driver and delivery vehicle.
We believe we are well positioned to effectively and profitably service
commercial customers, who typically require a higher level of customer service
and broad product availability. The commercial market has traditionally been
serviced primarily by jobbers. Recently, however, automotive specialty retailing
chains, such as our company, have entered the commercial market. The chains
typically have multiple locations in given market areas and maintain a broad
inventory selection. We believe we have significant competitive advantages in
servicing the commercial market because of our experienced sales associates,
conveniently located stores, attractive pricing and ability to consistently
deliver a broad product offering with an emphasis on national brand names.
As of January 31, 1999, we operated commercial service centers in 509 of
our stores. Our sales to commercial accounts (including sales by stores without
commercial service centers) increased 35% to $155.8 million in fiscal 1998 from
$115.4 million in fiscal 1997.
8
10
PURCHASING
Merchandise is selected from over 300 suppliers and purchased for all
stores by personnel at our corporate headquarters in Phoenix, Arizona. No one
class of product and no single supplier accounted for as much as 10% of our
purchases in fiscal 1998.
Our inventory management systems include the E-3 Trim Buying System, which
provides inventory movement forecasting based upon history, trend and
seasonality. Combined with service level goals, vendor lead times and cost of
inventory assumptions, the E-3 Trim Buying System determines the timing and size
of purchase orders. Approximately 90% of the dollar value of transactions are
sent via electronic data interchange, with the remainder being sent by a
computer facsimile interface. Our store replenishment system generates orders
based upon store on-hand and store model stock. This includes an automatic model
stock adjustment system utilizing historical sales, seasonality and store
presentation requirements. We also can allocate seasonal and promotional
merchandise based upon a store's history of prior promotional and seasonal
sales.
Our stores offer products with nationally recognized, well-advertised brand
names, such as Armor All, Autolite, AC Delco, Castrol, Dayco, Exide, Fel Pro,
Fram, Havoline, Mobil, Monroe, Pennzoil, Prestone, Quaker State, RayBestos,
Slick 50, Stant, Sylvania, Turtle Wax and Valvoline. In addition to brand name
products, our stores carry a wide variety of high quality private label
products. Because most of such products are produced by nationally recognized
manufacturers that produce similar brand name products that enjoy a high degree
of consumer acceptance, we believe that our private label products are of a
quality that is comparable to such brand name products.
We have increased our gross profit margin over the last several years
primarily as a result of obtaining lower product acquisition costs, more
favorable vendor terms, cash discounts from vendors, efficiencies from our
warehouse and distribution system and improvements in product mix. We believe
that the improved vendor terms are primarily the result of our improved
financial performance and stronger capitalization and growth in our store count
and purchase volume. Our gross profit margin increased from 39.6% of net sales
in fiscal 1995 to 47.1% of net sales in fiscal 1998.
WAREHOUSE AND DISTRIBUTION
Our warehouse and distribution system utilizes bar coding, radio frequency
scanners and sophisticated conveyor and put-to-light systems. We instituted
engineered labor standards and incentive programs in each of our distribution
centers which have contributed to improved labor productivity. Each store is
currently serviced by one of our two main distribution centers, with the
regional distribution centers handling bulk materials, such as oil. All of our
merchandise is shipped by vendors to our distribution centers, with the
exception of batteries, which are shipped directly to stores by the vendor. We
have sufficient warehouse and distribution capacity to meet the requirements of
our growth plans for the foreseeable future.
The following table sets forth certain information relating to our two main
distribution centers as of January 31, 1999:
NUMBER NUMBER OF
DISTRIBUTION SIZE OF STORES FULL-TIME
CENTER AREA SERVED (SQ. FT.) SERVED EMPLOYEES
- ------------ ----------- --------- --------- ---------
Phoenix, AZ Arizona, Colorado, Idaho, Nevada, New Mexico, 273,520 374 320
California, Texas, Utah
Dixon, CA California, Nevada, Washington, Oregon, Idaho, 325,500 433 342
Montana, Wyoming, Alaska
------- --- ---
599,020 807 662
======= === ===
We have the ability to expand the Phoenix distribution center by
approximately 80,000 square feet and the Dixon distribution center by 160,000
square feet.
9
11
ASSOCIATES
As of January 31, 1999, we employed approximately 7,300 full-time
associates and 3,250 part-time associates. Approximately 84% of these personnel
are employed in store level operations, 8% in distribution and 8% in our
corporate headquarters, including our call center and priority parts operation.
We have never experienced any material labor disruption and believe that
our labor relations are very good. Except for 399 associates located at
approximately 40 stores in the San Jose, California market, who have been
represented by a union for more than 19 years, none of our personnel are
represented by a labor union.
COMPETITION
We compete principally in the do-it-yourself sector of the automotive
aftermarket which is highly fragmented and generally very competitive. We
compete primarily with national and regional retail automotive parts chains
(such as AutoZone, Inc. and The Pep Boys-Manny, Moe and Jack, Inc.), wholesalers
or jobber stores (some of which are associated with national automotive parts
distributors or associations, such as NAPA), automobile dealers and mass
merchandisers that carry automotive replacement parts, maintenance items and
accessories (such as Wal-Mart Stores, Inc.). We believe that chains of
automotive parts stores like ours, 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. We believe 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 our business are store
location, customer service, product selection, availability, quality and price.
While we believe that we compete effectively in our 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
We own and have registered the service mark "Schuck's" with the United
States Patent and Trademark Office for use in connection with the automotive
parts retailing business. We have the right to use the tradenames "Checker" (in
connection with the automotive parts retailing business in the West and
Southeast regions of the United States) and "Kragen." In addition, we own and
have registered numerous trademarks with respect to many of our private label
products. We believe that our various tradenames, service marks and trademarks
are important to our merchandising strategy, but that our business is not
otherwise dependent on any particular service mark, tradename or trademark.
There are no infringing uses known by us that materially affect the use of such
marks.
ENVIRONMENTAL MATTERS
We are subject to various federal, state and local laws and governmental
regulations relating to the operation of our business, including those governing
recycling of batteries and used lubricants, and regarding ownership and
operation of real property. We handle hazardous materials during our operations,
and our customers may also use or bring hazardous materials onto our properties.
In addition, while we do not service automobiles, we do sublease to third
parties pre-existing service bays at a small number of store locations. These
third parties are required to dispose of certain items, including used
batteries, lubricants and oils in accordance with applicable environmental
regulations. We currently provide a recycling program for batteries and for the
collection of used lubricants at certain of our stores as a service to our
customers pursuant to agreements with third-party vendors. Pursuant to the
agreements, the batteries and used lubricants are collected by our associates,
deposited into vendor-supplied containers/pallets and then disposed of by the
third-party vendors. Our agreements with such vendors are designed to limit our
potential liability under applicable environmental regulations for any harm
caused by the batteries and lubricants to off-site properties
10
12
or even on-site when such failure is the fault of the vendor. Many of the
agreements provide us with indemnification against liability that we may incur
in connection with the disposal of such items.
Under environmental laws, a current or previous owner or operator of real
property may be liable for the cost of removal or remediation of hazardous or
toxic substances on, under, or in such property. Such laws often impose joint
and several liability and may be imposed without regard to whether the owner or
operator knew of, or was responsible for, the release of such hazardous or toxic
substances. We do not believe that compliance with such laws and regulations has
had a material impact on our operations to date, but there can be no assurance
that future compliance with such laws and regulations will not have a material
adverse effect on us.
ITEM 2. PROPERTIES
The following table sets forth certain information concerning our principal
facilities:
SQUARE NATURE OF
PRIMARY USE LOCATION FOOTAGE OCCUPANCY
- ----------- -------------- ------- ---------
Corporate office.............................. Phoenix, AZ 96,000 Leased(1)
Distribution center........................... Dixon, CA 325,500 Leased
Distribution center........................... Phoenix, AZ 273,520 Leased
Regional distribution center.................. Auburn, WA 52,400 Leased
Regional distribution center.................. Denver, CO 34,800 Leased
Regional distribution center.................. Salt Lake, UT 32,000 Leased
Regional distribution center.................. Commerce, CA 48,400 Leased
- ---------------
(1) This facility is owned by Missouri Falls Partners, an affiliate of The
Carmel Trust, a trust governed under the laws of Canada ("Carmel"). Carmel
is an affiliate of the Company and a member of the Carmel Group.
At January 31, 1999, all but six of our stores were leased. The expiration
dates (including renewal options) of the store leases are summarized as follows:
1998
YEARS STORES(1)
----- ---------
1999-2000.................................................. 9
2001-2005.................................................. 56
2006-2010.................................................. 72
2011-2020.................................................. 307
2021-2030.................................................. 322
2031-thereafter............................................ 35
- ---------------
(1) Of these stores, 1 is owned by affiliates of Carmel.
Additional information regarding our facilities appears in Item I. Business
under the captions "Store Operations," "Store Formats" and "Warehouse and
Distribution."
ITEM 3. LEGAL PROCEEDINGS
We were served with a lawsuit that was filed in the Superior Court in San
Diego, California on May 4, 1998. The case is brought by two former store
managers and a former assistant manager. It purports to be a class action for
all present and former California store managers and senior assistant managers
and seeks overtime pay for a period beginning in May 1995 as well as injunctive
relief requiring overtime pay in the future. This case is in the early stages of
discovery. We were recently served with two other lawsuits purporting to be
class actions filed in California state courts in Orange and Fresno Counties by
thirteen other former and current employees. These lawsuits include similar
claims to the San Diego lawsuit, except that they also
11
13
include claims for unfair business practices which seek overtime from October
1994. The Orange County lawsuit initially included a claim for punitive damages
based on an unlawful conversion theory. On March 9, 1999, the Orange County
court dismissed the conversion theory and claim for punitive damages but gave
the plaintiff 30 days to refile an amended claim. These plaintiffs have since
filed an amended complaint which also includes a claim for conversion and asks
for punitive damages. We have again requested the court to eliminate these items
from the case. The three cases have recently been "coordinated" before one judge
in San Diego County who will be selected shortly. If these cases are permitted
by the courts to proceed as a class action and are decided against us, our
aggregate potential exposure could be material to our results of operations for
the year in which the cases are ultimately decided. We do not believe, however,
that such an adverse outcome, if it were to happen, would materially affect our
financial position or our operations in subsequent periods. Although at this
early stage in the litigation it is difficult to predict their outcomes with any
certainty, we believe that we have meritorious defenses to all of these cases
and intend to defend them vigorously.
We currently and from time to time are involved in other litigation
incidental to the conduct of our business. The damages claimed against us in
some of these litigations are substantial. Although the amount of liability that
may result from these matters cannot be ascertained, we do not currently believe
that, in the aggregate, they will result in liabilities material to our
consolidated financial condition, results of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of fiscal 1998.
12
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock has been listed on the New York Stock Exchange under the
symbol CAO since March 12, 1998. As of April 13, 1999, there were 27,784,834
shares of our common stock outstanding. As of April 13, 1999, there were
approximately 65 record holders of our common stock.
The following table sets forth, for the periods indicated, the high and low
bid prices for our common stock as reported by the New York Stock Exchange.
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
------ ------
Fiscal 1998:
First Quarter (from March 12, 1998).............. $27.81 $22.00
Second Quarter................................... 28.50 23.13
Third Quarter.................................... 27.50 19.44
Fourth Quarter................................... 34.63 21.75
We have not paid any dividends on our common stock during the last two
fiscal years. We currently do not intend to pay any dividends on our common
stock.
We are a holding company with no business operations of our own. We
therefore depend upon payments, dividends and distributions from CSK Auto, Inc.,
our wholly owned subsidiary, for funds to pay dividends to our stockholders. CSK
Auto, Inc. currently intends to retain its earnings to fund its working capital,
debt repayment and capital expenditure needs and for other general corporate
purposes. CSK Auto, Inc. has no current intention of paying dividends or making
other distributions to us in excess of amounts necessary to pay our operating
expenses and taxes. CSK Auto, Inc.'s senior credit facility and the indenture
governing its 11% senior subordinated notes contain restrictions on CSK Auto,
Inc.'s ability to pay dividends or make payments or other distributions to us.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated statement of
operations, balance sheet and operating data. The selected statement of
operations and balance sheet data are derived from our consolidated financial
statements, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. You should read the data presented below together with our
consolidated financial statements and related notes, the other financial
information contained herein, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
13
15
FISCAL YEAR(1)
----------------------------------------------------------------
1998(2) 1997(3) 1996(4) 1995(5) 1994(6)
------------ ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SELECTED STORE DATA)
STATEMENT OF OPERATIONS DATA
Net sales.............................. $1,004,385 $845,815 $793,092 $718,352 $688,135
Cost of sales.......................... 531,073 468,171 463,374 433,817 410,358
---------- -------- -------- -------- --------
Gross profit........................... 473,312 377,644 329,718 284,535 277,777
Other costs and expenses:
Operating and administrative......... 391,863 327,838 312,908 284,697 258,600
Transition and integration
expenses.......................... 3,075 3,407 -- -- --
Stock-based compensation............. -- 909 -- -- --
Write-off of unamortized management
fee............................... 3,643 -- -- -- --
1996 Recapitalization charge......... -- -- 20,174 -- --
Secondary stock offering costs....... 770 -- -- -- --
---------- -------- -------- -------- --------
Operating profit (loss)................ 73,961 45,490 (3,364) (162) 19,177
Other 1996 Recapitalization charges.... -- 1,009 12,463 -- --
Interest expense, net.................. 30,730 40,680 20,691 14,379 10,343
---------- -------- -------- -------- --------
Income (loss) before taxes and
extraordinary gain (loss)............ 43,231 3,801 (36,518) (14,541) 8,834
Income tax expense (benefit)........... 15,746 1,557 (11,859) (5,447) 68
---------- -------- -------- -------- --------
Income (loss) before extraordinary gain
(loss)............................... 27,485 2,224 (24,659) (9,094) 8,766
Extraordinary gain (loss).............. (6,767) (3,015) -- -- 97,186
---------- -------- -------- -------- --------
Net income (loss)...................... $ 20,718 $ (771) $(24,659) $ (9,094) $105,952
========== ======== ======== ======== ========
Diluted earnings (loss) per share...... $ 0.75 $ (0.04) $ (2.28) $ (1.04) $ 12.15
========== ======== ======== ======== ========
Shares used for computation............ 27,640 18,012 10,819 8,724 8,724
========== ======== ======== ======== ========
OTHER DATA
EBITDA(7)............................ $ 103,861 $ 70,173 $ 50,544 $ 16,099 $ 32,282
EBITDAR(7)........................... 175,549 124,695 98,450 61,453 70,964
Capital expenditures................. 37,846 20,132 6,317 11,640 14,597
Commercial sales(8).................. 155,845 115,378 89,551 60,840 32,630
Net cash provided by (used in)
operating activities.............. 3,403 (62,703) (33,836) 1,354 15,120
Net cash used in investing
activities........................ (37,524) (56,727) (15,216) (7,888) (18,983)
Net cash provided by (used in)
financing activities.............. 36,759 119,059 49,911 8,028 (5,383)
SELECTED STORE DATA
Number of stores (end of period)..... 807 718 580 566 544
Percentage increase in comparable
store net sales(9)................ 2% 4% 6% 2% 5%
BALANCE SHEET DATA (END OF PERIOD)
Net working capital.................. $ 306,879 $235,651 $121,157 $ 81,048 $ 77,627
Total assets......................... 636,676 563,251 443,986 391,319 350,830
Total debt (including current
maturities)....................... 333,293 439,962 335,680 122,003 105,601
Stockholders' equity (deficit)....... 105,389 (75,055) (102,263) 59,997 69,091
See accompanying notes on pages 15 and 16.
14
16
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Our fiscal year consists of 52 or 53 weeks, ends on the Sunday nearest to
January 31 and is named for the calendar year just ended. All fiscal years
presented had 52 weeks except for fiscal 1996, which had 53 weeks.
(2) Results of operations in fiscal 1998 include: (1) an extraordinary loss of
$6.8 million, which consisted primarily of the premiums paid in connection
with the retirement of outstanding debt with the proceeds of our initial
public offering and the write-off of a portion of deferred debt issuance
costs; (2) $3.1 million of transition and integration expenses associated
with the Trak West Acquisition; (3) the write-off of a $3.6 million prepaid
management fee; and (4) $0.8 million of secondary offering costs. Excluding
these non-recurring items, net of related income tax benefit thereon, net
income for the fiscal year was $32.2 million or $1.13 per diluted share
(based on 28.6 million shares outstanding).
(3) In December 1997, we acquired 82 Trak West stores which have been included
in results of operations from the date of acquisition. Results of operations
in fiscal 1997 include: (1) an extraordinary loss of $3.0 million to reflect
the write-off of certain deferred financing costs associated with the early
extinguishment of our previous senior credit facility; (2) $3.4 million of
transition and integration expenses associated with the Trak West
Acquisition; and (3) $1.0 million of other expenses related to our
recapitalization in October 1996.
(4) Results of operations in fiscal 1996 include certain non-recurring charges
which were incurred when we consummated our recapitalization in October
1996, including the following: (1) amounts paid to members of management
pursuant to then existing equity participation agreements of $19.9 million
($20.2 million including a provision for estimated payroll taxes thereon);
and (2) expenses incurred in connection with the 1996 Recapitalization of
$12.5 million. Our fiscal 1996 results also include a charge of $12.9
million to reflect the store closing costs of 91 specific store sites. This
charge is included in operating and administrative expenses.
(5) Results of operations in fiscal 1995 include pre-opening expenses of $1.6
million associated with the opening of our new distribution center in
Phoenix, Arizona. Our fiscal 1995 operating and administrative expenses also
include $5.3 million of software development costs associated with the new
store-level information systems we installed during fiscal 1995. In
addition, we believe that our 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.
(6) Net income in fiscal 1994 includes an extraordinary gain of $97.2 million
resulting from cancellation of a portion of our long-term debt.
(7) 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 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 we believe
it is a meaningful measure which provides additional information with
respect to our ability to meet our 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 our 11%
Senior Subordinated Notes were issued and may differ in method of
calculation from similarly titled measures used by other companies.
15
17
The computation of EBITDA for each of the respective periods shown is as
follows:
FISCAL YEAR
--------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- -------- -------- -------
(IN THOUSANDS)
Income (loss) before income taxes
and extraordinary gain (loss).... $ 43,231 $ 3,801 $(36,518) $(14,541) $ 8,834
Add back:
Interest expense, net............ 30,730 40,680 20,691 14,379 10,343
Depreciation and amortization
expense....................... 22,412 20,367 19,225 16,261 13,105
Non-recurring 1996
Recapitalization expenses..... -- 1,009 32,637 -- --
Other non-recurring and non-cash
charges....................... 7,488 4,316 14,509 -- --
-------- ------- -------- -------- -------
Total.................... $103,861 $70,173 $ 50,544 $ 16,099 $32,282
======== ======= ======== ======== =======
EBITDAR represents EBITDA plus operating lease rental expense. Because the
proportion of stores leased versus owned varies among industry competitors,
we believe that EBITDAR permits a meaningful comparison of operating
performance among industry competitors. We lease substantially all of our
stores.
(8) Represents sales to commercial accounts, including sales from stores without
commercial sales centers.
(9) Comparable store net sales data is calculated based on the change in net
sales commencing after the time a new store has been open twelve months.
Therefore, sales for 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our fiscal year ends on the Sunday nearest to January 31 and is named for
the calendar year just ended. Occasionally this results in a fiscal year which
is 53 weeks long. When we refer to a particular fiscal year, we mean the
following:
- Fiscal 1998 means the 52 weeks ended January 31, 1999;
- Fiscal 1997 means the 52 weeks ended February 1, 1998; and
- Fiscal 1996 means the 53 weeks ended February 2, 1997.
GENERAL
CSK Auto Corporation is the largest retailer of automotive parts and
accessories in the Western United States and one of the largest retailers of
these products in the United States based, in each case, on our number of
stores. As of January 31, 1999, we operated 807 stores as one fully integrated
company under three brand names:
- Checker Auto Parts, founded in 1969 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.
16
18
Over the past several years, we have implemented a variety of initiatives
which have enabled us to significantly increase our productivity and the level
and quality of service we provide to customers. These initiatives include:
- Expanding our product selection and priority parts operation;
- Converting our warehouse and distribution system to a technologically
advanced, fully-integrated system;
- Installing sophisticated store-level information systems;
- Accelerating our store growth strategy; and
- Expanding our commercial sales program.
Largely as a result of the success of these programs, our profitability has
improved. We believe that these initiatives have provided the foundation for
continued and profitable growth.
The discussion which follows includes several references to charges and
effects relating to the following significant transactions which occurred during
the period covered:
- In October 1996, INVESTCORP S.A. and certain other investors (whom we
refer to as the "Investcorp Group") purchased a 51% equity interest in
our company in a series of related transactions resulting in a new
capitalization structure for our company. We refer to these transactions
as the "1996 Recapitalization."
- In December 1997, we acquired 82 stores located in the Los Angeles market
from Trak Auto Corporation for approximately $34.5 million. We refer to
this transaction as the "Trak West Acquisition."
- In March 1998, we completed the initial public offering of our common
stock and used the net proceeds to repay outstanding debt. We refer to
this transaction as our "IPO."
- In December 1998, certain of our stockholders completed a secondary
offering of our common stock. We received no proceeds from this offering
and incurred an aggregate of $770,000 in legal, accounting, printing and
other costs. We refer to this transaction as the "Secondary Offering."
17
19
RESULTS OF OPERATIONS
The following table sets forth our statement of operations data expressed
as a percentage of net sales for the periods indicated:
FISCAL YEAR
-----------------------
1998 1997 1996
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 52.9 55.4 58.4
----- ----- -----
Gross profit................................................ 47.1 44.6 41.6
Operating and administrative expenses....................... 39.0 38.8 39.5
Transition and integration expenses......................... 0.3 0.4 --
Stock-based compensation.................................... -- 0.1 --
Secondary offering costs.................................... 0.1 -- --
Write-off of unamortized management fee..................... 0.3 -- --
1996 Recapitalization charge -- equity participation
agreements................................................ -- -- 2.5
----- ----- -----
Operating profit (loss)..................................... 7.4 5.3 (0.4)
Other 1996 Recapitalization charges......................... -- 0.1 1.6
Interest expense, net....................................... 3.1 4.8 2.6
Income tax expense (benefit)................................ 1.6 0.1 (1.5)
----- ----- -----
Income (loss) before extraordinary loss..................... 2.7 0.3 (3.1)
Extraordinary loss.......................................... (0.6) (0.4) --
----- ----- -----
Net income (loss)........................................... 2.1% (0.1)% (3.1)%
===== ===== =====
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 our 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 1998 COMPARED TO FISCAL 1997
Net sales for fiscal 1998 increased $158.6 million, or 18.7% over net sales
for fiscal 1997, primarily reflecting an increase in the number of stores
operated. Our comparable store sales increased $17.5 million, or 2%. Our new
stores contributed $138.9 million to the increase in net sales for the fiscal
year, including $84.3 million in net sales contributed by the former Trak West
stores acquired on December 8, 1997. During fiscal 1998, we opened 94 stores,
relocated 31 stores, expanded 5 stores, acquired 2 stores and closed 7 stores in
addition to those closed due to relocation. As a result, we operated 807 stores
at the end of fiscal 1998 compared to 718 stores at the end of fiscal 1997.
Gross profit for fiscal 1998 was $473.3 million, or 47.1% of net sales,
compared to $377.6 million, or 44.6% of net sales for fiscal 1997. The increase
in gross profit percentage primarily resulted from our ability to obtain
generally better pricing and more favorable terms and support from our vendors
due to increased purchase volume, improved financial performance and stronger
capitalization.
Operating and administrative expenses increased by $64.0 million to $391.9
million, or 39.0% of net sales, for fiscal 1998 from $327.8 million, or 38.8% of
net sales for fiscal 1997. The increase is primarily the result of the operating
costs of new stores that are in the early stages of maturation and the operating
costs of the Trak West stores, which exceed our company-wide average as a
percent of sales.
18
20
Operating profit increased to $74.0 million, or 7.4% of net sales, for
fiscal 1998, compared to $45.5 million, or 5.3% of net sales, for fiscal 1997.
During the first quarter of 1998, we incurred $3.1 million of expenses
associated with the integration of the Trak West stores and a $3.6 million
non-recurring charge associated with the termination of a management agreement
as a result of our IPO. In the fourth quarter of fiscal 1998, we incurred $0.8
million of costs in connection with the Secondary Offering. Operating profit for
fiscal 1997 was affected by $3.4 million of expenses associated with the
integration of the Trak West stores and by $0.9 million of stock-based
compensation expense.
Interest expense for fiscal 1998 decreased to $30.7 million from $40.7
million for fiscal 1997. The expense decreased primarily as the result of the
early retirement of approximately $147.6 million of outstanding debt with the
proceeds of our IPO. The retirement of this debt also produced an extraordinary
loss of $6.8 million, net of tax, which consisted primarily of prepayment
premiums paid in connection with the redemption of debt and the write-off of a
portion of deferred debt issuance costs.
Income tax expense for fiscal 1998 was $15.7 million compared to income tax
expense of $1.6 million in fiscal 1997.
As a result of the factors cited above, net income increased in fiscal 1998
to $20.7 million, ($0.75 per diluted common share), from a net loss for fiscal
1997 of $0.8 million, or $0.04 per diluted share. Additionally, earnings before
interest, taxes, depreciation and amortization ("EBITDA") increased by $33.7
million to $103.9 million in fiscal 1998, compared to $70.2 million in fiscal
1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 increased $52.7 million, or 6.7%, 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. Included in the $22.2 million of new store sales is $10.6 million in net
sales contributed by the former Trak West stores acquired on December 8, 1997.
During fiscal 1997, we opened 65 new stores, relocated 36 stores, expanded 3
stores, sold 4 stores, closed 5 stores in addition to those closed due to
relocations and acquired the 82 Trak West stores. At February 1, 1998, we had
718 stores in operation compared to 580 stores at the end of fiscal 1996.
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 our ability to obtain generally better
pricing and more favorable terms from our vendors as a result of our increased
purchase volume, improved operating results and financial condition. In
addition, we 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 achieved by our
warehousing and distribution systems.
Operating and administrative expenses increased by $14.9 million to $327.8
million, or 38.8% of net sales, for fiscal 1997 from $312.9 million, or 39.5% of
net sales, for fiscal 1996. The increase in this expense is primarily the result
of the incremental operating costs of new stores that are in the early stages of
maturation. Also, we 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) $1.6 million of store closing costs in fiscal
1997 compared to $14.9 million of store closing costs in fiscal 1996; (2) $3.4
million of transition and integration expense in fiscal 1997 associated with the
Trak West Acquisition compared with no such expense occurring in fiscal 1996;
and (3) $20.2 million of charges in fiscal 1996 in connection with certain
equity participation agreements which became payable as a result of the 1996
Recapitalization compared with no such charges occurring in fiscal 1997. The
1996 store closing costs include a charge of $12.9 million to reflect the store
closing costs of 91 specific store sites that were included in an update of our
strategic plan for store relocation and expansion.
19
21
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 of new
subordinated debt and higher average bank borrowings.
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.
We incurred an extraordinary loss of $3.0 million, net of income taxes, in
fiscal 1997 as a result of the write-off of the deferred financing costs
associated with the amendment and restatement of our Senior Credit Facility.
As a result of the factors cited above, net loss decreased to $0.8 million
for fiscal 1997, compared to a net loss of $24.7 million for fiscal 1996.
Additionally, EBITDA increased by $19.7 million to $70.2 million for fiscal 1997
compared to $50.5 million for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements include working capital (primarily
inventory), debt service obligations and capital expenditures. We intend to
finance our cash requirements with cash flow from operations, funds from our
leasing facility and borrowings under our revolving credit facility. At January
31, 1999, we had net working capital of approximately $307 million and total
liquidity (cash plus availability under our revolving credit facility) of
approximately $53 million. We also have access to an off-balance sheet operating
lease facility that is used to finance new store construction. The facility
gives us up to $125 million of funding to provide for the acquisition and
development of 100 to 125 new stores over the period of February 1, 1998 through
May 31, 1999. As of January 31, 1999, approximately $35.8 million of this $125
million leasing facility had been committed. Our revolving credit facility
provides for borrowings of up to $125 million, of which $45.4 million of unused
capacity was available at January 31, 1999. We believe that cash flow from
operations combined with the availability of funds under the leasing facility
and the revolving credit facility will be sufficient to support our operations
and liquidity requirements for the foreseeable future.
We opened 130 new, relocated or expanded stores in fiscal 1998 and 104 new,
relocated or expanded stores in fiscal 1997. We expect to open, relocate or
expand approximately 150 stores in fiscal 1999. We anticipate that the majority
of these new, relocated or expanded stores will be financed by our lease
facility under arrangements structured as operating leases that require no net
capital expenditures except for fixtures and store equipment. For the remainder
of our planned new, relocated or expanded stores, we expect to spend
approximately $125,000 per store for leasehold improvements. In addition to
capital expenditures, each new store will require an estimated investment in
working capital, principally for inventories, of approximately $300,000. New
stores generally become profitable during the first full year of operations.
In addition to capital expenditures for new stores, we expect to spend
approximately $6.5 million over the next year for information systems hardware
and software (approximately $2.8 million of which is related to the "Year 2000"
issue discussed below). Our debt service requirements in 1999 include scheduled
principle reductions of approximately $9.6 million.
In fiscal 1998, net cash provided by operating activities was $3.4 million
compared to $62.7 million of cash used in operating activities during fiscal
1997. Net cash provided by operating activities has increased as a result of the
cash flow generated by the increasing profitability of our operations, reduced
by a significant investment in inventories.
Net cash used in investing activities totaled $37.5 million in fiscal 1998,
compared to $56.7 million in fiscal 1997. Significant items that affect the
comparability of investing activities include: (1) $37.8 million used for
capital expenditures in fiscal 1998 as a result of our new store development
program as compared to $20.1 million in fiscal 1997; and (2) $34.5 million in
cash used in the Trak West Acquisition during fiscal 1997.
20
22
Net cash provided by financing activities totaled $36.8 million in fiscal
1998 compared to $119.1 million in fiscal 1997. In 1998, net cash provided by
financing activities consisted of $126.0 million of revolving credit facility
borrowings, payments of debt of $87.1 million, $8.6 million of payments on
capital lease obligations, $0.4 million in proceeds from stock option exercises
and receipt of $0.2 million of stockholder receivables. In addition, we received
gross proceeds of $172.5 million in connection with our IPO, which were applied
as follows: (1) $13.9 million to pay underwriters' discounts and other
transaction costs; (2) $50.0 million to retire all outstanding 12% Subordinated
Notes; (3) $43.8 million to retire certain of the 11% Senior Subordinated Notes;
(4) $53.8 million to pay certain outstanding balances under the Senior Credit
Facility; (5) $4.9 million to pay premiums in connection with the retirement of
certain of the aforementioned debt instruments and the balance to pay accrued
interest and for general corporate purposes. In 1997, we borrowed $325.6 million
under the Senior Credit Facility, made payments of debt of $223.5 million, made
payments of capital lease obligations of $7.5 million, received $21.7 million in
proceeds from the private placement of common stock, received $6.0 million of
stockholder receivables and paid $3.2 million in connection with other financing
activities.
YEAR 2000 CONVERSION
Historically, certain computerized systems have used two digits rather than
four to define the applicable year. Computer equipment and software and devices
with imbedded technology that are time-sensitive may recognize a date using "00"
as the year 1900 rather than the year 2000, resulting in system failures or
miscalculations. This problem is generally referred to as "the Year 2000 issue."
During fiscal 1997, we began a comprehensive review of our systems and
applications for Year 2000 compliance. We also engaged an independent advisor to
evaluate and assist us with our Year 2000 program. To date, we have
substantially completed the identification and assessment phases of our Year
2000 conversion. We have included both information technology, such as purchased
software and point-of-sale computer systems, and non-information technology
equipment, such as warehouse conveyor systems, in our evaluations. In addition,
we have identified our key third-party business partners and we are coordinating
with them to address potential Year 2000 issues. These issues include data
exchange with us as well as their shipping and warehousing processes.
Although we anticipate minimal business disruption will occur in our
systems as a result of the Year 2000 issue, possible consequences include a loss
of communications links with certain store locations, and the inability to
process transactions, send purchase orders, or engage in similar normal business
activities. We presently believe that with modifications to existing software
and conversions to new software, the risk of our Year 2000 conversion can be
mitigated. However, if we do not make the necessary modifications and
conversions, or do not complete them in a timely manner, it could have a
material adverse effect on our operations.
We currently anticipate that our Year 2000 identification, assessment,
remediation and testing efforts, will be completed by July 31, 1999, although we
will continue to run system tests throughout the remainder of the year. As of
January 31, 1999, we have completed approximately 76% of our Year 2000
initiatives. To date, we have incurred and expensed approximately $0.8 million
related to the assessment of and preliminary efforts in connection with our Year
2000 conversion project. To date, we have also capitalized approximately $3.2
million in connection with the replacement of certain hardware and software
applications.
We estimate the total remaining cost of our Year 2000 conversion to be $4.9
million, which is being funded with lease financing and operating cash flows. Of
the total project cost, we attribute approximately $2.8 million to the purchase
of new hardware and software which will be capitalized. We will expense the
remaining $2.1 million as incurred over the next fiscal year.
We have begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from our failure and the failure of certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. We are currently developing contingency plans which should be
finalized by June 30, 1999. Elements of our
21
23
contingency plans may include: switching vendors, back-up systems or manual
processes, and the stockpiling of certain products prior to the Year 2000.
The costs of our Year 2000 conversion and the date on which we plan to
complete the project are based upon our management's best estimates, which were
derived utilizing numerous assumptions of future events. We cannot guarantee
that we will achieve these estimates. Specific factors that could cause material
differences between our actual results and our estimates include: (1) the
availability and cost of personnel trained in this area; (2) the success of
third parties in their Year 2000 conversion plans; and (3) the ability to locate
and correct all relevant computer codes and similar uncertainties.
QUARTERLY RESULTS AND SEASONALITY
Our business is somewhat seasonal in nature, with the highest sales
occurring in the summer months of June through August (overlapping our second
and third fiscal quarters). Our business is, in addition, affected by weather
conditions. While unusually severe or inclement weather tends to reduce sales as
our customers tend to defer elective maintenance during such periods, extremely
hot and cold temperatures tend to enhance sales by causing auto parts to fail
and sales of seasonal products to increase.
The following table sets forth certain quarterly unaudited operating data
for fiscal 1998 and 1997. The unaudited quarterly information includes all
adjustments which management considers necessary for a fair presentation of the
information shown.
The data presented below should be read in conjunction with our
consolidated financial statements and related notes and the other financial
information included herein.
FISCAL 1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales.......................................... $238,423 $254,701 $263,142 $248,119
Gross profit....................................... 107,717 117,661 127,031 120,903
Transition and integration expenses................ 3,075 -- -- --
Write-off of unamortized management fee............ 3,643 -- -- --
Secondary stock offering costs..................... -- -- -- 770
Operating profit(1)................................ 7,976 22,239 23,510 20,236
Extraordinary loss, net of $4,236 of income (6,767) -- -- --
taxes............................................
Net income (loss)(2)............................... (7,519) 9,342 10,527 8,368
Basic earnings (loss) per share(3)................. (0.32) 0.34 0.38 0.30
Diluted earnings (loss) per share(3)............... (0.32) 0.33 0.37 0.29
EBITDA............................................. $ 20,443 $ 27,877 $ 28,979 $ 26,562
22
24
FISCAL 1997
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net sales........................................... $201,613 $217,944 $216,908 $209,350
Gross profit........................................ 84,112 93,199 100,237 100,096
Transition and integration expenses................. -- -- -- 3,407
Operating profit(4)................................. 7,017 12,099 17,108 9,266
Extraordinary loss, net of $2,091 of income taxes... -- -- -- (3,015)
Net income (loss)(5)................................ (1,649) 1,267 4,320 (4,709)
Basic earnings (loss) per share(3).................. (0.10) 0.07 0.25 (0.26)
Diluted earnings (loss) per share(3)................ (0.10) 0.07 0.25 (0.25)
EBITDA.............................................. $ 11,759 $ 17,461 $ 22,454 $ 18,499
- ---------------
(1) Operating profit in the first quarter of fiscal 1998 was negatively affected
by non-recurring charges of $3.1 million related to the transition and
integration of the 82 Trak West stores (see note 3 to our consolidated
financial statements) and the $3.6 million write-off of the remaining
unamortized balance of a prepaid management consulting and advisory services
agreement that terminated by its terms upon consummation of our IPO.
Operating profit in the fourth quarter of fiscal 1998 was negatively
affected by non-recurring charges of $.8 million related to the Secondary
Offering.
(2) Net income in the first quarter of fiscal 1998 was negatively affected by a
$6.8 million extraordinary loss, net of a $4.2 million benefit for income
taxes, which consisted of prepayment premiums paid in connection with
redemption of debt and the write-off of a portion of deferred debt issuance
costs, as well as by the charges discussed in note (1) above, net of income
taxes.
(3) The sum of the quarterly earnings (loss) per share amounts within a fiscal
year differ from the total earnings (loss) per share for the fiscal year due
to the impact of differing weighted average share outstanding calculations.
(4) Operating profit in the fourth quarter of fiscal 1997 was negatively
affected by $3.4 million of transition and integration expenses related to
the acquisition of 82 former Trak West stores and by $0.9 million of
stock-based compensation.
(5) Net income in the fourth quarter of fiscal 1997 was negatively affected by
an extraordinary loss of $3.0 million related to the write-off of the
deferred financing costs associated with the early retirement of debt as
well as by the charges discussed in note (4) above, net of income taxes.
INFLATION
We do not believe our operations have been materially affected by
inflation. We believe that we will be able to mitigate the effects of future
merchandise cost increases principally through economies of scale resulting from
increased volumes of purchases, selective forward buying and the use of
alternative suppliers.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes new
standards for the way that public companies report selected information about
operating segments in interim and annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 had no effect
on our financial statements since we operate in a single segment.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits." This statement was adopted
during fiscal 1998 and only required certain disclosures in our financial
statements. The adoption did not have any effect on our financial position or
results of operations.
23
25
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. We will adopt SOP 98-1 in the first quarter of fiscal 1999 and do
not expect that such adoption will have a material effect on our financial
position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 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. Our current accounting policy with respect to the cost of
start-up activities (store preopening expenses) 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. We
will adopt SOP 98-5 in the first quarter of fiscal 1999, which will require us
to change our current accounting policy to expense start-up costs as incurred.
Upon adoption, we will expense approximately $1.2 million of preopening expenses
deferred as of January 31, 1999. Such expense will be reflected in the
consolidated statement of operations as the cumulative effect of a change in
accounting principle.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial market risks relating to our operations result primarily from
changes in interest rates. Interest earned on our cash equivalents as well as
interest paid on our Senior Credit Facility is variable rate and, accordingly,
sensitive to changes in interest rates. We believe the potential exposure to
interest rate risk is not material to our financial position or the results of
operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
24
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CSK Auto Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows present fairly, in all material respects, the financial position of CSK
Auto Corporation and subsidiary (the "Company") at January 31, 1999 and February
1, 1998, and the results of their operations and their cash flows for each of
the three years in the period ended January 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Phoenix, Arizona
April 2, 1999
25
27
CSK AUTO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
Net sales........................................... $ 1,004,385 $ 845,815 $ 793,092
Cost of sales....................................... 531,073 468,171 463,374
----------- ----------- -----------
Gross profit........................................ 473,312 377,644 329,718
Other costs and expenses:
Operating and administrative...................... 391,863 327,838 312,908
Transition and integration expenses............... 3,075 3,407 --
Stock-based compensation.......................... -- 909 --
Write-off of unamortized management fee........... 3,643 -- --
1996 Recapitalization charge -- equity
participation agreements....................... -- -- 20,174
Secondary stock offering costs.................... 770 -- --
----------- ----------- -----------
Operating profit (loss)............................. 73,961 45,490 (3,364)
Other 1996 Recapitalization expenses................ -- 1,009 12,463
Interest expense, net............................... 30,730 40,680 20,691
----------- ----------- -----------
Income (loss) before income taxes and extraordinary
loss.............................................. 43,231 3,801 (36,518)
Income tax expense (benefit)........................ 15,746 1,557 (11,859)
----------- ----------- -----------
Income (loss) before extraordinary loss............. 27,485 2,244 (24,659)
Extraordinary loss, net of $4,236 (fiscal 1998) and
$2,091 (fiscal 1997) of income taxes.............. (6,767) (3,015) --
----------- ----------- -----------
Net income (loss)................................... $ 20,718 $ (771) $ (24,659)
=========== =========== ===========
Basic earnings (loss) per share:
Income (loss) before extraordinary loss........... $ 1.03 $ 0.13 $ (2.28)
Extraordinary loss, net of income taxes........... (0.25) (0.17) --
----------- ----------- -----------
Net income (loss)................................. $ 0.78 $ (0.04) $ (2.28)
=========== =========== ===========
Shares used in computing per share amounts........ 26,722,322 17,400,214 10,818,913
=========== =========== ===========
Diluted earnings (loss) per share:
Income (loss) before extraordinary loss........... $ 0.99 $ 0.12 $ (2.28)
Extraordinary loss, net of income taxes........... (0.24) (0.16) --
----------- ----------- -----------
Net income (loss)................................. $ 0.75 $ (0.04) $ (2.28)
=========== =========== ===========
Shares used in computing per share amounts........ 27,640,099 18,011,666 10,818,913
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
26
28
CSK AUTO CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, FEBRUARY 1,
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents................................... $ 7,490 $ 4,852
Receivables, net of allowances of $1,703 and $2,403,
respectively.............................................. 58,867 37,566
Inventories................................................. 414,422 367,366
Assets held for sale........................................ 5,018 2,418
Prepaid expenses and other current assets................... 18,295 14,143
--------- ---------
Total current assets.............................. 504,092 426,345
--------- ---------
Property and equipment, net................................. 105,037 85,940
Leasehold interests, net.................................... 9,643 10,934
Deferred income taxes....................................... 10,695 22,021
Other assets, net........................................... 7,209 18,011
--------- ---------
Total assets...................................... $ 636,676 $ 563,251
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable............................................ $ 122,304 $ 114,270
Accrued payroll and related expenses........................ 25,962 20,869
Accrued expenses and other current liabilities.............. 35,312 40,818
Due to affiliates........................................... -- 1,000
Current maturities of amounts due under Senior Credit
Facility.................................................. 840 1,000
Current maturities of capital lease obligations............. 8,749 8,671
Deferred income taxes....................................... 4,046 4,066
--------- ---------
Total current liabilities......................... 197,213 190,694
--------- ---------
Amounts due under Senior Credit Facility.................... 224,320 239,050
Obligations under 11% Senior Subordinated Notes............. 81,250 125,000
Obligations under 12% Subordinated Notes.................... -- 50,000
Obligations under capital leases............................ 18,134 16,241
Other....................................................... 10,370 17,321
--------- ---------
Total non-current liabilities..................... 334,074 447,612
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.01 par value, 50,000,000 shares
authorized (fiscal 1998), 41,666,752 shares authorized
(fiscal 1997); 27,768,832 and 19,113,388 shares issued
and outstanding at January 31, 1999 and February 1,
1998, respectively..................................... 278 191
Additional paid-in capital.................................. 289,820 130,513
Stockholder receivable...................................... (1,018) (1,168)
Deferred compensation....................................... (493) (675)
Accumulated deficit......................................... (183,198) (203,916)
--------- ---------
Total stockholders' equity (deficit).............. 105,389 (75,055)
--------- ---------
Total liabilities and stockholders' equity
(deficit)....................................... $ 636,676 $ 563,251
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
27
29
CSK AUTO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN STOCKHOLDER DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT (DEFICIT)
---------- ------ ---------- ----------- ------------ ----------- ---------
Balances 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)
---------- ---- -------- ------- ----- --------- ---------
Balances at February 2, 1997.... 17,105,000 171 106,677 (5,966) -- (203,145) (102,263)
Recovery of stockholder
receivable.................... -- -- -- 5,966 -- -- 5,966
Sale of Class B stock........... 180,600 2 2,172 (1,168) -- -- 1,006
Sale of stock -- Trak West
Acquisition................... 1,827,788 18 20,989 -- -- -- 21,007
Deferred compensation........... -- -- 675 -- (675) -- --
Net loss........................ -- -- -- -- -- (771) (771)
---------- ---- -------- ------- ----- --------- ---------
Balances at February 1, 1998.... 19,113,388 191 130,513 (1,168) (675) (203,916) (75,055)
Amortization of deferred
compensation.................. -- -- -- -- 182 -- 182
Recovery of stockholder
receivable.................... -- -- -- 150 -- -- 150
Issuance of common stock in
initial public offering, net
of transaction costs.......... 8,625,000 86 158,537 -- -- -- 158,623
Stock compensation.............. -- -- 220 -- -- -- 220
Exercise of options............. 30,444 1 366 -- -- -- 367
Tax benefit of exercise of
options....................... -- -- 184 -- -- -- 184
Net income...................... -- -- -- -- -- 20,718 20,718
---------- ---- -------- ------- ----- --------- ---------
Balances at January 31, 1999.... 27,768,832 $278 $289,820 $(1,018) $(493) $(183,198) $ 105,389
========== ==== ======== ======= ===== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
28
30
CSK AUTO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
Cash flows provided by (used in) operating activities:
Net income (loss)......................................... $ 20,718 $ (771) $ (24,659)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and 20,930 18,078 17,290
equipment.............................................
Amortization of leasehold interests..................... 919 1,176 1,749
Amortization of other deferred charges.................. 563 1,113 186
Amortization of deferred financing costs................ 1,016 2,043 1,504
Tax benefit relating to stock option exercises.......... 184 -- --
Extraordinary loss on early retirement of debt, net of 6,767 3,015 --
income taxes..........................................
Write-off of unamortized deferred charge................ 3,643 -- --
Deferred income taxes................................... 15,542 1,557 (11,859)
Change in operating assets and liabilities, net of
effects of acquisitions:
Receivables........................................... (21,056) (9,055) (3,063)
Inventories........................................... (45,848) (63,830) (19,250)
Prepaid expenses and other current assets............. (200) (4,057) (5,316)
Accounts payable...................................... 7,925 (13,732) (25,707)
Accrued payroll, accrued expenses and other current (947) (1,760) 29,120
liabilities........................................
Other operating activities.............................. (6,753) 3,520 6,169
-------- --------- ---------
Net cash provided by (used in) operating activities..... 3,403 (62,703) (33,836)
-------- --------- ---------
Cash flows used in investing activities:
Capital expenditures...................................... (37,846) (20,132) (6,317)
Expenditures for assets held for sale..................... (19,144) (12,335) (19,023)
Proceeds from sale of property and equipment and assets 21,650 10,966 14,667
held for sale...........................................
Due to affiliate.......................................... (1,000) -- (4,530)
Store acquisitions........................................ (892) (34,504) --
Other investing activities................................ (292) (722) (13)
-------- --------- ---------
Net cash used in investing activities....................... (37,524) (56,727) (15,216)
-------- --------- ---------
Cash flows provided by financing activities:
Borrowings under Senior Credit Facility................... 126,000 325,550 805,242
Payments under Senior Credit Facility..................... (87,065) (223,500) (763,304)
Issuance of common stock in initial public offering,...... 172,482 -- --
Underwriter's discount and other IPO costs................ (13,859) -- --
Premiums paid upon early retirement of debt............... (4,875) -- --
Retirement of 11% Senior Subordinated Notes............... (43,750) -- --
Retirement of 12% Subordinated Notes...................... (50,000) -- --
Payment of Senior Credit Facility with public offering (53,825) -- --
proceeds................................................
Issuance of 11% Senior Subordinated Notes................. -- -- 125,000
Issuance of 12% Subordinated Notes........................ -- -- 50,000
Payments on capital lease obligations..................... (8,634) (7,478) (5,888)
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........................ 150 5,966 --
Note issuance costs....................................... -- -- (18,632)
Exercise of options....................................... 367 -- --
Other financing activities................................ (232) (3,193) (4,921)
-------- --------- ---------
Net cash provided by financing activities............... 36,759 119,059 49,911
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 2,638 (371) 859
Cash and cash equivalents, beginning of period.............. 4,852 5,223 4,364
-------- --------- ---------
Cash and cash equivalents, end of period.................... $ 7,490 $ 4,852 $ 5,223
======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
29
31
CSK AUTO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CSK Auto Corporation is a holding company. At January 31, 1999, 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 subsidiary are referred to herein as "the Company."
CSK Auto, Inc. is a specialty retailer of automotive aftermarket parts and
accessories. At January 31, 1999, the Company operated 807 stores in 13 Western
states as a fully integrated company under three brand names: Checker Auto
Parts, founded in 1969 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 in the
accompanying financial statements from December 9, 1997, the date of acquisition
(see Note 3). 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.