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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1997
REGISTRATION NO. 333-22511
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 3
to
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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CSK AUTO, INC.
AND OTHER REGISTRANTS*
(Exact name of registrant as specified in its charter)
ARIZONA 5531 86-0221312
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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645 E. MISSOURI AVENUE
PHOENIX, ARIZONA 85012
(602) 265-9200
(Address, including zip code, and telephone number,
including area code, of registrant's and co-registrant's principal executive
offices)
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JAMES G. BAZLEN
645 E. MISSOURI AVENUE
PHOENIX, ARIZONA 85012
(602) 265-9200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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With copies to:
CHARLES K. MARQUIS, ESQ. RICHARD M. RUSSO, ESQ.
GIBSON, DUNN & CRUTCHER LLP GIBSON, DUNN & CRUTCHER LLP
200 PARK AVENUE 1801 CALIFORNIA STREET, SUITE 4200
NEW YORK, NEW YORK 10166 DENVER, COLORADO 80202
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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*Other Registrants
EXACT NAME OF REGISTRANT STATE OR OTHER JURISDICTION OF PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER
AS SPECIFIED IN ITS CHARTER INCORPORATION OR ORGANIZATION CLASSIFICATION CODE NUMBERS IDENTIFICATION NUMBER
- --------------------------- ------------------------------ --------------------------- ---------------------
Kragen Auto Supply Co. California 5531 94-2761234
Schuck's Distribution Co. Washington 5531 91-1542425
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 13, 1997
CSK Auto, Inc. LOGO CSK AUTO, INC.
OFFER FOR ALL OUTSTANDING
11% SENIOR SUBORDINATED NOTES DUE 2006
IN EXCHANGE FOR
11% SERIES A SENIOR SUBORDINATED NOTES DUE 2006
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JUNE 16, 1997, UNLESS EXTENDED.
GUARANTEED BY THE FOLLOWING SUBSIDIARIES OF CSK AUTO, INC.:
KRAGEN AUTO SUPPLY CO.
SCHUCK'S DISTRIBUTION CO.
CSK Auto, Inc., an Arizona corporation (the "Company"), hereby offers (the
"Exchange Offer"), upon the terms and subject to the conditions set forth herein
and in the related Letter of Transmittal, to exchange up to $125.0 million
aggregate principal amount of 11% Series A Senior Subordinated Notes Due 2006
(the "Notes") of the Company for a like amount of the privately placed 11%
Senior Subordinated Notes Due 2006 (the "Old Notes") of the Company issued on
October 30, 1996, from the holders thereof (together with the holders of Notes,
"Holders").
The Notes are being offered hereunder in order to satisfy the obligations
of the Company under a Registration Rights Agreement dated October 30, 1996 (the
"Registration Rights Agreement") by and among Kragen Auto Supply Co. and
Schuck's Distribution Co. (the "Initial Guarantors"), the Company, and
Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce
Fenner & Smith Incorporated (the "Initial Purchasers"). The Exchange Offer is
designed to provide to Holders an opportunity to acquire Notes which, unlike the
Old Notes, are expected to be freely transferable at all times, subject to state
"blue sky" law restrictions, provided that the Holder is not an "affiliate" of
the Company within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and represents that the Notes are being acquired in the
ordinary course of such Holder's business and the Holder is not engaged in, and
does not intend to engage in, a distribution of the Notes. With the exception of
the freely transferable nature of the Notes, the Notes are substantially
identical to the Old Notes. See "The Exchange Offer -- Purpose of the Exchange
Offer."
The Company will accept for exchange any and all validly tendered Old Notes
on or prior to 5:00 P.M., New York time, on June 16, 1997, unless extended (the
"Expiration Date"). Tenders of Old Notes made pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration Date. In the event the Company
terminates the Exchange Offer and does not accept any Old Notes with respect to
the Exchange Offer, the Company will promptly return such Old Notes to the
Holders thereof. The Company will not receive any proceeds from the Exchange
Offer.
The Notes will be general obligations of the Company subordinated in right
of payment to all Senior Indebtedness (as defined herein) of the Company. The
Notes will also be guaranteed fully, unconditionally and jointly and severally
by all of the Company's subsidiaries, including the Initial Guarantors and any
future U.S. subsidiaries on a senior subordinated basis. The guarantees will be
subordinated to the prior payment in full of all Guarantor Senior Indebtedness
(as defined herein) of such subsidiaries. At February 2, 1997, the Company and
its subsidiaries had outstanding an aggregate principal amount of approximately
$160.7 million of indebtedness and obligations under capital leases which ranked
senior in right of payment to the Notes and guarantees, all of which was Senior
Indebtedness (as defined herein) of the Company and none of which was Guarantor
Senior Indebtedness.
(Continued on following page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 13 HEREIN FOR A DISCUSSION OF CERTAIN RISKS
THAT HOLDERS OF OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 13, 1997.
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Interest on the Notes will be payable semi-annually on May 1 and November 1
of each year, commencing on November 1, 1997. The Notes will mature on November
1, 2006. Except as described below, the Notes will not be redeemable at the
Company's option prior to November 1, 2001. On or after November 1, 2001, the
Notes may be redeemed at the option of the Company, in whole or in part, at the
redemption prices set forth herein, together with accrued and unpaid interest
and Liquidated Damages (as defined herein), if any, to the date of redemption.
In addition, at any time on or prior to November 1, 1999, the Company may,
subject to certain requirements, redeem up to 35% of the original aggregate
principal amount of the Notes with the net cash proceeds of an Equity Offering
(as defined herein), at a price equal to 110% of the principal amount to be
redeemed, together with accrued and unpaid interest and Liquidated Damages, if
any, to the date of redemption; provided that at least 65% of the original
principal amount of the Notes remains outstanding. The Notes will not be subject
to any sinking fund requirement. Upon the occurrence of a Change of Control (as
defined herein), the Company will be required to make an offer to repurchase the
Notes at a price equal to 101% of the principal amount thereof, together with
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase. There is no assurance that in the event of a Change of Control the
Company will have, or will have access to, sufficient funds to repurchase the
Notes. See "Change of Control Put/Default Under Senior Credit Agreement" and
"Description of Notes -- Repurchase at the Option of Holders."
The Old Notes were sold by the Company on October 30, 1996 to the Initial
Purchasers in a transaction not registered under the Securities Act in reliance
upon an exemption under the Securities Act. The Initial Purchasers subsequently
placed the Old Notes with qualified institutional buyers in reliance upon Rule
144A under the Securities Act and with a limited number of institutional
accredited investors that agreed to comply with certain transfer restrictions
and other conditions. Accordingly, the Old Notes may not be reoffered, resold or
otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available.
Based on certain interpretive letters issued by the staff of the Securities
and Exchange Commission to third parties, the Company believes that a Holder of
Notes (other than (i) a broker-dealer who purchases such Notes directly from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person who is an affiliate of the Company within
the meaning of Rule 405 under the Securities Act) who exchanges Old Notes for
Notes in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement or understanding with any person
to participate, in the distribution of the Notes, will be allowed to resell the
Notes to the public without further registration under the Securities Act and
without delivering to the purchasers of the Notes a prospectus that satisfies
the requirements of the Securities Act. See "The Exchange Offer -- Purpose of
the Exchange Offer" and "-- Resales of Notes." However, a broker-dealer who
holds Old Notes that were acquired for its own account as a result of
market-making or other trading activities may be deemed to be an "underwriter"
within the meaning of the Securities Act and must, therefore, deliver a
prospectus meeting the requirements of the Securities Act. If any other Holder
is deemed to be an "underwriter" within the meaning of the Securities Act or
acquires Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Notes, such holder must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available. For a period of one year from the
Expiration Date, the Company will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
There has been no public market for the Old Notes and no active public
market for the Notes is currently anticipated. The Company currently does not
intend to apply for the listing of the Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. The Initial
Purchasers have advised the Company that each of the Initial Purchasers
currently intends to make a market in the Notes; however, neither is obligated
to do so and any market-making may be discontinued by either Initial Purchaser
at any time without notice. Accordingly, no assurance can be given as to the
liquidity or the trading market for the Notes.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject to
certain customary conditions. See "The Exchange Offer." Old Notes may be
tendered only in integral multiples of $1,000.
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AVAILABLE INFORMATION
CSK Auto, Inc. and the Initial Guarantors have filed with the Securities
and Exchange Commission (the "Commission") a registration statement relating to
the Notes offered hereby (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby made
to the Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an Exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description thereof, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits and schedules thereto may be inspected without charge
and copies at prescribed rates at the Public Reference Section of the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The Commission maintains a website that contains
reports, proxy and information statements and other information filed
electronically with the Commission at http://www.sec.gov. In addition, the
Company and the Initial Guarantors have agreed to furnish to Holders of the
Notes and Old Notes and prospective purchasers and securities analysts, upon
their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
NEW HAMPSHIRE RESIDENTS:
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE
FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE
STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE ATTORNEY GENERAL OR THE
SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND
NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR
EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE ATTORNEY
GENERAL HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR
RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS
UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER,
OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS SECTION.
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TABLE OF CONTENTS
PAGE
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AVAILABLE INFORMATION....................................... 3
SUMMARY..................................................... 5
RISK FACTORS................................................ 13
FORWARD LOOKING STATEMENTS.................................. 16
USE OF PROCEEDS............................................. 16
THE EXCHANGE OFFER.......................................... 17
ACQUISITION AND FINANCINGS.................................. 25
CAPITALIZATION.............................................. 26
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA... 27
SELECTED CONSOLIDATED FINANCIAL DATA........................ 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 32
BUSINESS.................................................... 40
MANAGEMENT.................................................. 53
CERTAIN TRANSACTIONS........................................ 59
PRINCIPAL STOCKHOLDERS...................................... 63
CREDIT AGREEMENT............................................ 65
DESCRIPTION OF NOTES........................................ 67
PLAN OF DISTRIBUTION........................................ 96
LEGAL MATTERS............................................... 96
EXPERTS..................................................... 96
CHANGE IN ACCOUNTANTS....................................... 97
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
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The Company owns the federally-registered service mark "Schuck's" for use in
connection with the automotive parts retailing business and owns rights to use
the tradenames "Checker" and "Kragen." This Prospectus also includes product
names and other tradenames and service marks of the Company and of other
companies.
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SUMMARY
This summary should be read in conjunction with and is qualified in its
entirety by the more detailed information and Consolidated Financial Statements,
including the footnotes thereto, appearing elsewhere in this Prospectus. As used
in this Prospectus unless otherwise indicated, the "Company" refers to CSK Auto,
Inc. and its subsidiaries, and references to the Company's fiscal year mean the
fiscal year ended on the Sunday nearest January 31 of the following calendar
year (e.g., fiscal 1995 means the fiscal year ended January 28, 1996). In
addition to the historical information contained herein, certain statements in
this Prospectus constitute "forward-looking statements" under the Private
Securities Litigation Reform Act (the "Reform Act") which involve risks and
uncertainties. The Company's actual results may differ significantly from those
discussed herein. Factors that might cause such a difference include, but are
not limited to, those discussed under the captions "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as those discussed elsewhere in this Prospectus. See "Risk
Factors -- Forward-Looking Statements."
THE COMPANY
The Company is the largest retailer of automotive parts and accessories in
the Western United States and one of the largest such retailers in the United
States. As of February 2, 1997, the Company operated 580 stores as a fully
integrated chain under three tradenames, each of which at one time represented a
separate retail chain: Checker Auto Parts, founded in 1968 and operating in the
Southwestern and Rocky Mountain states; Schuck's Auto Supply, founded in 1917
and operating in the Pacific Northwest; and Kragen Auto Parts, founded in 1947
and operating primarily in California. Each chain has a long operating history,
established name recognition and a loyal customer base in its respective
markets. Based on store count, the Company believes it is the largest retailer
of automotive parts and accessories in 18 of its 24 markets.
The Company is a consumer-oriented, specialty retailer primarily servicing
the do-it-yourself ("DIY") customer, with an increasing emphasis on the
commercial customer. The Company offers a broad selection of national brand name
and private label automotive products for domestic and imported cars, vans and
light trucks, including new and remanufactured automotive hard parts,
maintenance items and accessories. The Company's operating strategy is to offer
these products at generally the lowest prices in each of its markets and at
conveniently located and attractively designed stores, supported by
knowledgeable and courteous customer service personnel. As a specialty retailer,
the Company has chosen not to sell tires or perform automotive repairs.
Beginning in fiscal 1994, the Company initiated a strategic review of its
operations in order to improve profitability, enhance customer service, improve
the efficiency of its operations and prepare the Company for accelerated growth.
In connection with this program, the Company designed and implemented a
sophisticated, centralized infrastructure, installed various store-level
information systems, initiated its Commercial Sales Program and accelerated its
store expansion and repositioning programs to increase the penetration of its
existing markets. Implementation of these initiatives involved large
expenditures, including approximately $51.3 million of capital and operating
expenditures, and caused certain operating inefficiencies, which adversely
impacted operating results during fiscal 1995. However, the Company believes
these initiatives have provided significant momentum to the Company's operations
and have enabled the Company to significantly improve its operating results
during fiscal 1996. During fiscal 1996, the Company's sales increased to $793.1
million from $718.4 million in fiscal 1995 and its EBITDA increased to $50.5
million from $16.1 million in fiscal 1995. See "Summary Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Several of the key initiatives that have been implemented by the Company
are summarized below.
- Commercial Sales Program -- The Company formalized and expanded its
marketing efforts to the commercial segment of the automotive
aftermarket, which the Company believes constitutes in excess of 50% of
the approximately $75 billion of annual sales for this market. The
Company increased the number of stores with Commercial Sales Centers from
an initial roll-out of five at September 30, 1994 to 176 at January 28,
1996 and to 292 at February 2, 1997. Principally as a result of this
expansion, the Company's sales to commercial accounts (including sales by
stores without Commercial Sales Centers) grew to $89.6 million in fiscal
1996 from $60.8 million in fiscal 1995 and $32.6 million in fiscal 1994.
The Company's Commercial Sales Program became profitable in the first
quarter of fiscal 1996. Based on the success of this Program, the Company
is evaluating opportunities to add Commercial Sales Centers to additional
existing stores and to new stores.
- Warehouse and Distribution -- The Company completed the conversion of its
warehouse and distribution facilities from a manual, labor-intensive,
paper-based system to a technologically advanced, fully-integrated
system, which has significantly reduced warehouse and distribution costs
while providing the Company with sufficient capacity to meet the
requirements of its growth plans for the foreseeable future. This new
system became fully operational during the fourth quarter of fiscal 1995.
In fiscal 1996, the Company's warehouse and distribution expense as a
percentage of sales declined to 3.8% from 4.9% during the comparable
period of fiscal 1995.
- Store-Level Information Systems -- The Company installed several
store-level systems which have improved store labor productivity and
enabled the Company to provide enhanced customer service. These
initiatives have included installing a new Point-of-Sale system ("POS"),
integrating the POS with the Company's Electronics Parts Catalog,
implementing its Retail Paperless Management System and installing a
store-wide satellite communications network.
- Customer Service Initiatives -- In order to better develop its employees'
technical expertise and customer service skills, the Company increased
its focus on formal classroom training and on-the-job training, customer
service measurement systems and incentive programs for its district
managers, store managers, sales associates and other employees. The
Company believes these programs have resulted in an increased level of
customer service and store-level efficiency.
- Expanded Product Selection -- The Company expanded its Priority Parts
operation by improving its delivery system and adding eight strategically
located parts depots to its two existing locations. This expansion has
enabled the Company to better serve its customers by making available to
more than 400 of its stores, on a same day delivery basis, an additional
200,000 stock keeping units not regularly stocked in its stores and has
also enabled it to increase sales to commercial accounts due to the
broader availability of automotive hard parts. Prior to this expansion,
this same day delivery service was available to only 80 of the Company's
stores. The Company believes that its Priority Parts operation provides
it with an important competitive advantage.
- Centralized Call Center -- The Company completed the installation of a
centralized Call Center that handles the overflow of customer calls
during the stores' busiest hours of operation. Use of the Call Center
allows sales associates to give undivided attention to customers at the
store, while customers who call the store are serviced directly by Call
Center operators who are dedicated to such callers. As a result, the Call
Center has enhanced customer service while improving store labor
productivity. At February 2, 1997, over 200 of the Company's stores had
access to the Call Center.
- Store Expansion and Repositioning -- The Company has accelerated the
relocation of smaller stores to larger stores at better locations, the
expansion of certain other stores and the opening of new stores primarily
in existing markets. During fiscal 1996, the Company opened a total of 56
new stores (of which 37 resulted from relocations of existing stores) and
expanded eight stores.
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The Company's strategy is to continue to increase its revenue and cash flow
by capitalizing on the systems and programs which it has implemented and by
substantially growing its store count. The Company believes that key components
of its expected profitability improvements will be: (i) the continued maturation
of its existing Commercial Sales Centers, combined with expansion of its
Commercial Sales Program to additional stores; (ii) increased operating margins
as a result of efficiencies in its warehouse and distribution system and its
significant investments in store-level systems, which are expected to improve
store labor productivity; and (iii) accelerating the Company's new store opening
and relocation program.
The focus of the Company's expansion strategy is to open, relocate or
expand stores primarily in its existing markets in order to further increase its
name recognition and market penetration while benefiting from economies of scale
in advertising, management and distribution costs. The Company opened, relocated
or expanded 64 stores in fiscal 1996 and 63 stores in fiscal 1995 and plans to
open, relocate or expand approximately 75 to 100 stores in fiscal 1997. As of
February 2, 1997, the Company has executed purchase contracts or leases for 51
additional stores and is in various stages of negotiation for 78 more sites. The
Company has also identified numerous potential additional sites for future
expansion. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a discussion of
the anticipated capital expenditures and sources of financing for the Company's
expansion plans.
THE ACQUISITION
On October 30, 1996, certain affiliates of INVESTCORP S.A. ("Investcorp")
and certain other investors (collectively with Investcorp, the "Initial
Investcorp Group") acquired for $105.0 million in cash a 51% common equity
interest in CSK Group, Ltd. ("Holdings"), which holds 100% of the capital stock
of the Company. A corporation in which an affiliate of Investcorp holds a
minority interest also acquired $40.0 million principal amount of 12.0% senior
subordinated notes due 2008 of Holdings (the "Holdings Notes") for $40.0 million
in cash, increasing the total investment by such corporation and the Initial
Investcorp Group in securities of Holdings to $145.0 million. Following these
transactions, the Carmel Trust ("Carmel"), which previously had held 100% of the
common stock of Holdings, held a 49% common equity interest in Holdings (as more
fully described under "Principal Stockholders") and an affiliate of Carmel held
$10.0 million principal amount of Holdings Notes. Immediately prior to, and
following, the Acquisition and Financings, the Initial Investcorp Group
controlled a majority of the Company's Board of Directors. Simultaneously with
the closing of the Acquisition and Financings, Carmel, the Initial Investcorp
Group, Holdings and the Company entered into a stockholders' agreement with
respect to the voting and, in certain circumstances, the disposition of the
shares of capital stock of Holdings. See "Acquisition and Financings," "Use of
Proceeds" and "Certain Transactions -- Stockholders' Agreement."
The Company's executive offices are located at 645 E. Missouri Avenue,
Phoenix, Arizona 85012 and its telephone number is (602) 265-9200.
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THE EXCHANGE OFFER
Securities Offered............ Up to $125,000,000 principal amount of 11%
Series A Senior Subordinated Notes Due November
1, 2006 (the "Notes").
The Exchange Offer............ The Notes are being offered in exchange for a
like principal amount of the Company's Old
Notes. Old Notes may be exchanged only in
integral multiples of $1,000. The issuance of
the Notes is intended to satisfy the
obligations of the Company under the terms of
the Registration Rights Agreement.
Tenders; Expiration Date;
Withdrawal.................. The Exchange Offer will expire at 5:00 P.M.,
New York City time on June 16, 1997, or such
later date and time to which it is extended by
the Company (the "Expiration Date"). Tenders of
Old Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration
Date. In the event the Company terminates the
Exchange Offer and does not accept for exchange
any Old Notes pursuant to the Exchange Offer,
the Company will promptly return such Old Notes
to the Holders thereof.
Accrued Interest on the
Notes......................... The Notes will bear interest from and including
the date of issuance of the Old Notes.
Accordingly, Holders who receive Notes in
exchange for Old Notes will forgo accrued but
unpaid interest on their exchanged Old Notes
for the period from and including the date of
issuance of the Old Notes to the date of
exchange, but will be entitled to such interest
under the Notes.
Conditions of the Exchange
Offer......................... The Exchange Offer is subject to certain
customary conditions, any or all of which may
be waived by the Company. The Company currently
expects that each of the conditions will be
satisfied and that no waivers will be
necessary. See "The Exchange Offer --
Conditions to the Exchange Offer."
Procedures for Tendering Old
Notes......................... Each Holder wishing to accept the Exchange
Offer must complete and sign the Letter of
Transmittal, in accordance with the
instructions contained therein, and submit the
Letter of Transmittal to the Exchange Agent
identified below. See "The Exchange Offer --
Procedures for Tendering."
Guaranteed Delivery
Procedures.................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes and Letter of Transmittal and
any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date, must tender their Old Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures."
Acceptance of Old Notes and
Delivery of Notes........... The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 P.M., New York
City time on the Expiration Date. See "The
Exchange Offer -- Acceptance of Old Notes for
Exchange; Delivery of Notes."
Rights of Dissenting
Holders....................... Holders of Old Notes do not have any appraisal
or dissenters' rights in connection with the
Exchange Offer.
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Federal Income Tax
Consequences.................. In the opinion of Gibson, Dunn & Crutcher LLP,
the exchange of the Old Notes for Notes
pursuant to the Exchange Offer will have no
material federal income tax consequences to the
holders of the Old Notes. See "The Exchange
Offer -- Federal Income Tax Consequences."
Exchange Agent................ The Bank of New York; telephone (212) 815-5920.
See "The Exchange Offer -- Exchange Agent."
Use of Proceeds............... There will be no cash proceeds to the Company
from exchanges made pursuant to the Exchange
Offer.
CONSEQUENCES OF EXCHANGING OLD NOTES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, Holders of Old Notes (other than any
Holder who is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) who exchanged their Old Notes for Notes pursuant to the
Exchange Offer generally may offer such Notes for resale, resell such Notes and
otherwise transfer such Notes without compliance with the registration and
prospectus delivery provisions of the Securities Act provided such Notes are
acquired in the ordinary course of the Holder's business and such Holder has no
arrangement with any person to participate in a distribution of such Notes. Each
broker-dealer that receives Notes for its own account in exchange for Old Notes
must acknowledge that it will deliver a prospectus in connection with any resale
of such Notes. See "Plan of Distribution." In addition, to comply with the
securities laws of certain jurisdictions, if applicable, the Notes may not be
offered or sold unless they have been registered or qualified for sale in such
jurisdiction or an exemption from registration or qualification is available and
the conditions thereto have been met. The Company has agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to register or qualify the Notes for offer or sale under the securities
or blue sky laws of such jurisdictions as any Holder of the Notes or the Old
Notes reasonably requests in writing. If a Holder of Old Notes does not exchange
such Old Notes for Notes pursuant to the Exchange Offer, such Old Notes will
continue to be subject to the restrictions on transfer contained in the legend
thereon. In general, the Old Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. See "The Exchange Offer -- Purpose of the Exchange Offer" and "-- Resales
of Notes."
TERMS OF THE NOTES
The terms of the Notes are substantially identical in all material respects
to the terms of the Old Notes, except that the Notes are expected to be freely
transferable as described under "The Exchange Offer -- Resales of Notes."
Maturity................... November 1, 2006.
Interest Payment Dates..... May 1 and November 1 of each year, commencing on
November 1, 1997.
Optional Redemption........ Except as described below, the Notes will not be
redeemable by the Company prior to November 1,
2001. On or after that date, the Notes may, subject
to certain requirements, be redeemed at the option
of the Company, in whole or in part, at the
redemption prices set forth therein, together with
accrued and unpaid interest and Liquidated Damages
(as defined herein) thereon, if any, to the date of
redemption. In addition, at any time on or prior to
November 1, 1999, the Company may, subject to
certain requirements, redeem up to 35% of the
original aggregate principal amount of the Notes
with the net cash proceeds of an Equity Offering
(as defined herein) at a price equal to 110% of the
principal
9
11
amount to be redeemed, together with accrued and
unpaid interest and Liquidated Damages, if any, to
the redemption date; provided that immediately
following such redemption not less than 65% of the
original aggregate principal amount of the Notes
remains outstanding.
Mandatory Redemption....... None, except as set forth under "Description of
Notes -- Repurchase at the Option of
Holders -- Change of Control" and "-- Asset Sales."
Guarantee.................. The Notes will be fully, unconditionally and
jointly and severally guaranteed on a senior
subordinated basis by all existing subsidiaries and
any future U.S. subsidiaries of the Company.
Ranking.................... The Notes will be senior subordinated obligations
of the Company, subordinated in right of payment to
all existing and future Senior Indebtedness of the
Company, including indebtedness incurred under the
Senior Credit Facility (as defined herein). The
guarantees of the subsidiaries of the Company will
be subordinated to the prior payment in full of all
Guarantor Senior Indebtedness of such subsidiaries.
At February 2, 1997, the Company and its
subsidiaries had outstanding an aggregate principal
amount of approximately $160.7 million of
indebtedness and obligations under capital leases
which ranked senior in right of payment to the
Notes and guarantees, all of which was Senior
Indebtedness of the Company and none of which was
Guarantor Senior Indebtedness.
Change of Control.......... Upon an occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase the Notes at a price equal to 101% of
the aggregate principal amount thereof plus accrued
and unpaid interest and Liquidated Damages thereon,
if any, to the date of purchase. The Company may be
prohibited in certain circumstances from making
such repurchase. See "Risk Factors -- Control of
the Company; Change of Control Put/Default Under
Senior Credit Agreement."
Certain Covenants.......... The indenture governing the Notes (the "Indenture")
contains certain covenants that impose limitations
on, among other things: (i) the incurrence of
additional indebtedness, (ii) the issuance of
Disqualified Stock (as defined herein) by the
Company and preferred stock by its subsidiaries,
(iii) the making of certain Restricted Payments (as
defined herein), (iv) the imposition of
restrictions on the payments of dividends and other
payment restrictions affecting subsidiaries, (v)
anti-layering, (vi) the incurrence of liens, (vii)
transactions with affiliates and (viii) the
consummation of certain mergers, consolidations or
sales of assets.
Absence of a Prior Public
Market for the Notes....... There has been no public market for the Old Notes
and no active public market for the Notes is
currently anticipated. The Initial Purchasers have
advised the Company that each of them currently
intends to make a market in the Notes. However,
neither Initial Purchaser is obligated to do so,
and any market making with respect to the Notes may
be discontinued at any time without notice. No
assurance can be given as to the liquidity of the
trading market for the Notes following the Exchange
Offer.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated statement of
operations, consolidated balance sheet and operating data of the Company. The
summary statement of operations and balance sheet data for the fiscal year ended
February 2, 1997 are derived from the Consolidated Financial Statements of the
Company, which have been audited by Coopers & Lybrand L.L.P., independent
accountants, and appear elsewhere herein. The summary statement of operations
and balance sheet data for each of the two fiscal years during the period ended
January 28, 1996 are derived from the Consolidated Financial Statements of the
Company, which have been audited by Price Waterhouse LLP, independent
accountants, and appear elsewhere herein. The data presented below should be
read in conjunction with the Consolidated Financial Statements, including the
related Notes thereto, the other financial information included herein, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FISCAL YEAR ENDED(1)
----------------------------------
JAN. 29, JAN. 28, FEB. 2,
1995(2) 1996(3) 1997(4)
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SQUARE
FOOT DATA)
STATEMENT OF OPERATIONS DATA:
Net sales......................................................... $688,135 $718,352 $793,092
Gross profit...................................................... 277,777 284,535 329,718
Operating and administrative expenses............................. 255,922 281,387 298,004
Store closing costs............................................... 2,678 3,310 14,904
Acquisition charge -- equity participation agreements............. -- -- 20,174
Operating profit (loss)........................................... 19,177 (162) (3,364)
Other Acquisition and Financings fees............................. -- -- 12,463
Net income (loss)................................................. 105,224 (9,094) (23,534)
OTHER DATA:
EBITDA(5)......................................................... $ 32,282 $ 16,099 $ 50,544
EBITDAR(5)........................................................ 70,964 61,453 98,450
Ratio of net debt to EBITDA(5)(6)................................. 3.2x 7.3x 5.5x
Ratio of EBITDA to interest expense(5)(7)......................... 3.1x 1.1x 2.7x
Capital expenditures.............................................. 14,597 11,640 6,317
Commercial sales(8)............................................... 32,630 60,840 89,551
Warehouse and distribution expense (as a percentage of net
sales)(9)....................................................... 4.3% 4.9% 3.8%
Net cash provided by (used in) operating activities............... 15,120 (3,361) (38,366)
Net cash (used in) investing activities........................... (18,983) (7,888) (10,686)
Net cash provided by (used in) financing activities............... (5,383) 12,743 49,911
Ratio of earnings to fixed charges(10)............................ 1.3x -- --
SELECTED ADDITIONAL OPERATING DATA:
Average net sales per store(11)................................... $ 1,272 $ 1,294 $ 1,384
Average net sales per store square foot(11)....................... $ 226 $ 224 $ 228
Percentage increase in comparable store net sales(12)............. 5.2% 2.1% 5.9%
FISCAL YEAR ENDED(1)
----------------------------------
JAN. 29, JAN. 28, FEB. 2,
1995 1996 1997
-------- -------- --------
SELECTED STORE DATA:
Beginning stores.................................................. 538 544 566
New stores........................................................ 10 24 19
Relocated stores.................................................. 12 30 37
Closed stores (including relocated stores)........................ (16) (32) (42)
Ending stores..................................................... 544 566 580
Expanded stores................................................... 5 9 8
Stores with Commercial Sales Centers.............................. 59 176 292
Total store square footage (at period end)(000s)(9)............... 3,097 3,329 3,631
------------------------
AS OF
---------------------------
JANUARY 28, FEBRUARY 2,
1996 1997
----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 4,364 $ 5,223
Net working capital........................................................ 81,048 121,157
Total assets............................................................... 391,319 439,543
Total debt (including current maturities).................................. 122,003 285,680
Stockholder's equity (deficit)............................................. 59,997 (56,706)
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- ---------------
(1) The Company's fiscal year consists of 52 or 53 weeks ending on the Sunday
nearest to January 31. The fiscal years presented consist of 52 weeks,
except for fiscal 1996, which consists of 53 weeks.
(2) Net income in fiscal 1994 includes an extraordinary gain of $97.2 million
resulting from cancellation of a portion of the Company's long-term debt.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes 5 and 11 to Consolidated Financial
Statements.
(3) Results of operations in fiscal 1995 include the following non-recurring
items: (i) cost of sales includes pre-opening expenses of $1.6 million
associated with the opening of the new distribution center in Phoenix,
Arizona, and (ii) operating and administrative expenses include $5.3
million of non-recurring software development costs associated with the new
store-level information systems installed by the Company during fiscal
1995. In addition, the Company believes that its operations and operating
results were adversely impacted during fiscal 1995 as a result of the
implementation and installation of many new initiatives. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(4) Amounts hereunder reflect certain non-recurring charges which were incurred
in October 1996 when the Acquisition and Financings were consummated,
including the following: (i) amounts to be paid to members of management
pursuant to an existing employee incentive plan of $19.9 million ($20.2
million including a provision for estimated payroll taxes thereon), of
which one half was paid in October 1996 (the remaining balance will be paid
in October 1997), and (ii) expenses incurred in connection with the
Acquisition and Financings of $12.5 million. Amounts hereunder also include
a charge of $12.9 million for store relocations to be undertaken because of
the Company's improved access to funding as a result of the Real Estate
Agreement (as defined herein). See "Management -- Equity Participation
Agreements," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 12 to Consolidated Financial
Statements.
(5) EBITDA represents income before net interest expense, provision for income
taxes, depreciation and amortization expense, other non-cash charges
(including the $12.9 million charge described in Note 4 above),
extraordinary items and non-recurring charges and has been calculated in
accordance with the terms of the Indenture. While EBITDA is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles ("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 to provide additional information
with respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The computation of EBITDA for each of the respective periods shown is as
follows (in thousands):
JAN. 29, 1995 JAN. 28, 1996 FEB. 2, 1997
------------- ------------- ------------
Income (loss) before income taxes and
extraordinary gain............................ $ 8,834 $(14,541) $(34,852)
Plus: Interest expense................................ 10,343 14,379 19,025
Depreciation and amortization................... 13,105 16,261 19,225
Non-recurring Acquisition and Financings charges
and fees...................................... -- -- 32,637
Other non-recurring and other non-cash
charges....................................... -- -- 14,509
-------- -------- --------
Total: $ 32,282 $ 16,099 $ 50,544
======== ======== ========
EBITDAR represents EBITDA plus operating lease rental expense. As the
Company leases substantially all of its stores, EBITDAR permits a more
meaningful measure of operations before occupancy expense, since the
proportion of stores leased versus owned varies among the industry
competitors.
(6) Represents ratio of net debt to EBITDA. Net debt represents total debt less
cash and cash equivalents. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(7) Interest expense includes amortization of deferred financing fees.
(8) Represents sales to commercial customers, including sales from the
Company's Commercial Sales Centers.
(9) Warehouse and distribution expense is included in cost of sales.
(10) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs, and one-third of lease expense, which management believes
is representative of the interest component of lease expense. For fiscal
years 1995 and 1996, earnings were insufficient to cover fixed charges by
$14.5 million and $34.9 million, respectively. Accordingly, such ratios
have not been presented.
(11) Total store square footage is based on the Company's actual store formats
and includes normal selling, office, stockroom and receiving space. Average
net sales per store and average net sales per store square foot are based
on the average of beginning and ending number of stores and store square
footage and are not weighted to take into consideration the actual dates of
store openings, closings or expansions.
(12) Comparable store net sales data is calculated based on the change in net
sales commencing after the time a new store has been opened twelve months.
The first twelve months during which 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.
12
14
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating the Company and its
business. Certain statements under this caption may constitute "forward-looking
statements" as that term is used in the Reform Act.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company is highly leveraged. At February 2, 1997, the Company had an
aggregate of $263.0 million of outstanding indebtedness for borrowed money.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest on the Notes and interest on its other existing
indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) indebtedness under the Senior Credit Facility will be at
variable rates of interest, which will cause the Company to be vulnerable to
increases in interest rates; (iv) the Company may be hindered in its ability to
adjust rapidly to changing market conditions; and (v) the Company's substantial
degree of leverage could make it more vulnerable in the event of a downturn in
general economic conditions or in its business.
The Senior Credit Facility matures prior to the maturity of the Notes. In
the event that the Company is unable to refinance the Senior Credit Facility or
raise funds to repay the facility through asset sales, sales of equity or
otherwise, its ability to pay the principal of and interest on the Notes would
be adversely affected.
SUBORDINATION OF NOTES; ENCUMBRANCE OF ASSETS
The Company's existing subsidiaries, including the Initial Guarantors, and
future U.S. subsidiaries (collectively, the "Subsidiary Guarantors") have
guaranteed (the "Subsidiary Guarantees") the obligations of the Company under
the Indenture and the Notes. The Notes and the Subsidiary Guarantees are general
obligations of the Company and each Subsidiary Guarantor, respectively, and are
subordinate in right of payment to all Senior Indebtedness and Guarantor Senior
Indebtedness as the case may be, of the Company and such Subsidiary Guarantor,
including all amounts owing under the Senior Credit Facility. In addition, the
borrowings under the Senior Credit Facility are secured by a first priority
security interest in substantially all the personal property of the Company.
Holdings has also issued a guarantee of the loans under the Senior Credit
Facility, which guarantee is secured by a pledge by Holdings of all issued and
outstanding capital stock of the Company. Each of the U.S. subsidiaries of the
Company has also issued a guarantee under the Senior Credit Facility which is
secured by a first priority security interest in substantially all personal
property of such subsidiary, and the Company has pledged the issued and
outstanding capital stock of each such subsidiary owned by the Company to secure
indebtedness under the Senior Credit Facility. See "Credit Agreement." In the
event of a bankruptcy, liquidation or reorganization of the Company or any
Subsidiary Guarantor, the assets of the Company or such Subsidiary Guarantor, as
the case may be, would be available to pay obligations on the Notes or its
Subsidiary Guarantee, as the case may be, only after all of its Senior
Indebtedness or Guarantor Senior Indebtedness, as the case may be, has been paid
in full, and there may not be sufficient assets remaining to pay amounts due on
any or all of the Notes then outstanding. At February 2, 1997, the Company and
its subsidiaries had outstanding an aggregate principal amount of approximately
$160.7 million of Senior Indebtedness and Guarantor Senior Indebtedness (without
duplication) which would rank senior in right of payment to the Notes and
guarantees and approximately $62.0 million of unused commitment under the Senior
Credit Facility, of which, as of February 2, 1997, $43.1 million was available
due to borrowing base restrictions contained therein. Additional Senior
Indebtedness or Guarantor Senior Indebtedness, as the case may be, including
secured indebtedness, may be incurred by the Company and the Subsidiary
Guarantors from time to time subject to certain restrictions contained in the
Senior Credit Facility and the Indenture. See "Description of
Notes -- Subordination," "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock" and "Credit Agreement."
13
15
FRAUDULENT CONVEYANCE CONCERNS
Any Subsidiary Guarantee that has been or will be provided by a Subsidiary
Guarantor could be challenged by other creditors of such Subsidiary Guarantor as
a fraudulent conveyance under relevant federal and state statutes and, under
certain circumstances (including a finding that such Subsidiary Guarantor was
insolvent at the time its Subsidiary Guarantee was incurred), a court could hold
that the obligations under such Subsidiary Guarantee may be voided, subordinated
to claims of other creditors, or limited to less than their stated amount. The
measure of insolvency for purposes of the foregoing may vary depending upon the
law of the jurisdiction that is being applied, but a company generally would be
considered insolvent if the sum of its debts is greater than all of its property
at a fair valuation or if the present fair salable value of its assets is less
than the amount that will be required to pay its probable liability on its
existing debts as they become absolute and mature.
RESTRICTIVE LOAN COVENANTS
The Senior Credit Facility imposes upon the Company certain financial and
operating covenants including, among other things, requirements that the Company
maintain certain financial ratios and satisfy certain financial tests,
limitations on capital expenditures, and restrictions on the ability of the
Company to incur indebtedness, pay dividends or take certain other corporate
actions. All of these restrictions may impair the Company's ability to expand or
to pursue its business strategies. In addition, the Senior Credit Facility
prohibits, with certain limited exceptions, the optional or mandatory prepayment
or other defeasance of the Notes. The Senior Credit Facility requires that,
under certain circumstances, the Company make prepayments of the term loans
outstanding thereunder with (i) 75% of any Excess Cash Flow (as defined therein)
and (ii) 50% of the Net Proceeds (as defined therein) from certain offerings of
the Company's voting stock. See "Credit Agreement."
In addition to the limits imposed by the Senior Credit Facility,
instruments evidencing future borrowings by the Company will likely contain
similar restrictions. Changes in economic or business conditions, results of
operations or other factors could in the future cause a violation of one or more
covenants in the Company's debt instruments, entitling the holders of such
indebtedness to declare the indebtedness immediately due and payable. There can
be no assurance that the assets of the Company will be sufficient to repay any
such accelerated indebtedness, and any indebtedness containing cross-default
provisions to such indebtedness, including the Notes. See "Credit Agreement."
RECENT LOSSES
The Company incurred net losses during three of its last five fiscal years,
including a loss of $0.7 million in fiscal 1993, $9.1 million in fiscal 1995 and
$23.5 million in fiscal 1996. The Company also incurred a slight operating loss
in fiscal 1995. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." While income before taxes for fiscal 1996 would have
been $12.3 million before non-recurring Acquisition and Financings charges and
fees and provisions for store closings and other non-recurring charges, and
while the Company has taken various initiatives to improve its results of
operations, there can be no assurance that the Company will attain profitability
or achieve continued growth in operating performance.
GROWTH STRATEGY; UNCERTAINTY OF FUTURE OPERATING RESULTS
In order to improve its future operating results, the Company has
undertaken certain initiatives, including implementation of the Company's
expansion strategy, which is based, in part, on expanding successful stores at
existing locations, relocating existing stores in the same markets and adding
new stores primarily to markets currently served by the Company. The future
growth and financial performance of the Company are, therefore, dependent upon a
number of factors, including the Company's ability to locate and obtain
acceptable store sites, negotiate favorable lease terms, complete the
construction of new and relocated stores in a timely manner, hire, train and
retain competent managers and associates, and integrate new stores into the
Company's systems and operations. There can be no assurance that the Company
will be able to continue to increase sales in existing stores or that opening
new stores in markets already served by the Company will not adversely affect
existing store profitability or comparable store sales. There also can be no
assurance that the Company will be able to manage its growth effectively. See
"Management's Discussion and Analysis of
14
16
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Store Development and Expansion Strategy."
CHANGE OF CONTROL PUT / DEFAULT UNDER SENIOR CREDIT AGREEMENT
Upon the occurrence of a Change of Control (as defined herein), the Company
will be required to make an offer to repurchase the Notes at a price equal to
101% of the principal amount thereof, together with accrued and unpaid interest
and Liquidated Damages thereon. In addition, a Change of Control of the Company
will give rise to a default and rights of acceleration under the Senior Credit
Facility and, in all likelihood, other Senior Indebtedness to which the Company
becomes a party. Such acceleration would prevent repurchase of the Notes as a
result of the subordination provisions applicable to the Notes until the Senior
Indebtedness has been paid in full, decreasing the likelihood that the Company
would have the financial resources to repurchase all or any part of the Notes,
and consequently there can be no assurance that sufficient resources will be
available for such purpose. Even if such acceleration does not occur, the
existence of a default under the Senior Credit Facility and, in all likelihood,
other Senior Indebtedness, will also prohibit payments on the Notes under
certain circumstances for a specified period. See "Description of Notes --
Subordination."
COMPETITION
The retail sale of automotive parts and accessories is highly competitive.
The Company competes primarily with national and regional retail automotive
parts chains, wholesalers or jobber stores (some of which are associated with
national automotive parts distributors or associations), automobile dealers that
supply manufacturer parts and mass merchandisers that carry automotive
replacement parts and accessories. Some of the Company's competitors are larger
and have greater financial resources than the Company. See
"Business -- Competition."
DEPENDENCE ON VENDOR RELATIONSHIPS
The Company's business is dependent upon developing and maintaining close
relationships with its vendors and its ability to purchase products from these
vendors on favorable price and other terms. A disruption of these vendor
relationships could have a material adverse effect on the Company's business.
See "Business -- Purchasing."
DEPENDENCE ON EXECUTIVE OFFICERS
Prior to the Acquisition, Jules Trump, who served as the Company's Chairman
of the Board and Chief Executive Officer until January 27, 1997, announced his
intention to leave the employ of the Company once a suitable replacement Chief
Executive Officer could be located. The Company has hired a new Chief Executive
Officer and Mr. Trump has left the employ of the Company, although he continues
to be a director of the Company. No assurance can be given that the loss of one
or more of the Company's executive officers would not have an adverse impact on
the Company. The Company does not maintain "key person" life insurance with
respect to its executive officers. The Company's continued success will also be
dependent upon its ability to retain existing, and attract additional, qualified
personnel to meet the Company's needs. See "Management -- Directors and
Executive Officers."
ECONOMIC AND WEATHER CONDITIONS; REGIONAL CONCENTRATION
All of the Company's stores are located in the Western United States. As a
result, the Company's business is sensitive to the economic and weather
conditions of that region. In recent years, certain parts of that region have
experienced economic recessions and extreme weather conditions. Temperature
extremes tend to enhance sales by causing a higher incidence of parts failure
and increasing sales of seasonal products. However, unusually severe weather can
reduce sales by causing deferral of elective maintenance. No prediction can be
made as to future economic or weather conditions in the regions in which the
Company operates.
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17
LACK OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERABILITY
There is currently no established market for the Old Notes. No assurance
can be given as to the liquidity of the trading market for the Notes, or, in the
case of non-tendering holders of Old Notes, the trading market for the Old Notes
following the Exchange Offer. If such markets were to exist, the Notes could
trade at prices that may be higher or lower than the initial market values
thereof depending on many factors, including prevailing interest rates and the
markets for similar securities. The Exchange Offer will not be conditioned upon
any minimum or maximum aggregate principal amount of Notes being tendered for
exchange. The Initial Purchasers have advised the Company that each of them
currently intends to make a market in the Notes. However, neither Initial
Purchaser is obligated to do so, and any market making with respect to the Notes
may be discontinued at any time without notice. See "Description of
Notes -- Registration Rights; Liquidated Damages" and "Private Placement."
The Company does not intend to apply for listing of the Notes on any
securities exchange or for quotation through the Nasdaq National Market. The
liquidity of, and trading market for, the Notes may be adversely affected by
general declines in the market for similar securities, independent of the
financial performance of, and prospects for, the Company.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," and words of similar import, constitute "forward-looking
statements" within the meaning of the Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company or the
retail industry to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally and in the Western United States; the Company's
substantial leverage and debt service obligations; restrictions on the Company's
ability to pursue its business strategies imposed by restrictive loan covenants;
changes in business strategy or development plans; competition; the loss of key
personnel; weather conditions in the Western United States; and other factors
referenced in this Prospectus, including, without limitation, under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
USE OF PROCEEDS
The Company will receive no proceeds from the exchange of Notes for Old
Notes pursuant to the Exchange Offer.
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18
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is designed to provide Holders of Old Notes with an
opportunity to acquire Notes which, unlike the Old Notes, will be freely
tradable at all times, subject to any restrictions on transfer imposed by state
"blue sky" laws and provided that (i) the Holder is not an affiliate of the
Company within the meaning of the Securities Act, and (ii) represents that the
Notes are being acquired in the ordinary course of such Holder's business and
the Holder is not engaged in, and does not intend to engage in a distribution of
the Notes. The outstanding Old Notes in the aggregate principal amount of $125.0
million were originally issued and sold on October 30, 1996 (the "Original Issue
Date") in order to provide financing in connection with the redemption of stock
of Holdings held by Carmel. The original sale to the Initial Purchasers was not
registered under the Securities Act in reliance upon the exemption provided by
Section 4(2) of the Securities Act and the concurrent resale of the Old Notes to
investors was not registered under the Securities Act in reliance upon the
exemption provided by Rule 144A promulgated under the Securities Act. The Old
Notes may not be reoffered, resold or transferred other than pursuant to a
registration statement filed pursuant to the Securities Act or unless an
exemption from the registration requirements of the Securities Act is available.
Pursuant to Rule 144, Old Notes may generally be resold (a) commencing one year
after the Original Issue Date, in an amount up to, for any three-month period,
the greater of 1% of the Old Notes then outstanding or the average weekly
trading volume of the Old Notes during the four calendar weeks immediately
preceding the filing of the required notice of sale with the Commission and (b)
commencing two years after the Original Issue Date, in any amount and otherwise
without restriction by a Holder who is not, and has not been for the preceding
90 days, an affiliate of the Company. The Old Notes are eligible for trading in
the PORTAL Market, and may be resold to certain Qualified Institutional Buyers
pursuant to Rule 144A. Certain other exemptions may also be available under
other provisions of the federal securities laws for the resale of the Old Notes.
In connection with the original issue and sale of the Old Notes, the
Company and the Initial Guarantors entered into a Registration Rights Agreement,
pursuant to which they agreed to file with the Commission a registration
statement covering the exchange by the Company of the Notes for the Old Notes
(the "Exchange Offer Registration Statement"). The Registration Rights Agreement
provides that (i) the Company and the Initial Guarantors will file the Exchange
Offer Registration Statement with the Commission on or prior to 120 days after
the Original Issue Date, (ii) the Company and the Initial Guarantors will use
their respective best efforts to have the Exchange Offer Registration Statement
declared effective by the Commission on or prior to 210 days after the Original
Issue Date, (iii) unless the Exchange Offer would not be permitted by applicable
law or Commission policy, the Company and the Initial Guarantors will commence
the Exchange Offer and use their respective best efforts to issue on or prior to
30 business days after the date on which the Exchange Offer Registration
Statement is declared effective by the Commission, Notes in exchange for all Old
Notes tendered prior thereto in the Exchange Offer, and (iv) if obligated to
file a shelf registration statement covering the Old Notes (a "Shelf
Registration Statement"), the Company will file the Shelf Registration Statement
with the Commission on or prior to 60 days after such filing obligation arises
and use its best efforts to cause the Shelf Registration Statement to be
declared effective by the Commission on or prior to 180 days after such
obligation arises and cause such Shelf Registration Statement to remain
effective and usable for a period of three years following the initial
effectiveness thereof. If (a) the Company and the Initial Guarantors fail to
file any of the registration statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b) any of such
registration statements is not declared effective by the Commission on or prior
to the date specified for such effectiveness, (c) the Company fails to
consummate the offer within 30 business days after the date on which the
Exchange Offer Registration Statement is declared effective, or (d) the Shelf
Registration Statement or the Exchange Offer Registration Statement is declared
effective but thereafter ceases to be effective or usable in connection with
resales of Transfer Restricted Securities (as defined below) during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), the Company and the
Initial Guarantors, jointly and severally, will pay liquidated damages
("Liquidated Damages") to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per
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$1,000 principal amount of Transfer Restrictive Securities held by such person.
The amount of the Liquidated Damages will increase by an additional $.05 per
week per $1,000 principal amount of Transfer Restricted Securities with respect
to each subsequent 90-day period until all Registration Defaults have been cured
up to a maximum amount of Liquidated Damages of $.30 per week per $1,000
principal amount of Transfer Restricted Securities (regardless of whether one or
more than one Registration Default is outstanding). Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease. For
purposes of the foregoing, "Transfer Restricted Securities" means each Old Note
until (i) the date on which such Old Note has been exchanged by a person other
than a broker-dealer for a Note in the Exchange Offer, (ii) the date on which
such Old Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement, (iii) the date
on which such Old Note is distributed to the public pursuant to Rule 144 under
the Securities Act, or (iv) following the exchange by a broker-dealer in the
Exchange Offer of an Old Note for a Note, the date on which such Note is sold to
a purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of a prospectus meeting the requirements of the Securities Act in
connection with resales of securities received by the broker-dealer in any such
exchange.
The staff of the Commission has issued certain interpretive letters that
concluded, in circumstances similar to those contemplated by the Exchange Offer,
that new debt securities issued in a registered exchange for outstanding debt
securities, which new securities are intended to be substantially identical to
the securities for which they are exchanged, may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such securities from the issuer to resell pursuant to Rule 144A or
any other available exemption under the Securities Act or (ii) a person who is
an affiliate of the issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provision
of the Securities Act, provided that the new securities are acquired in the
ordinary course of such holder's business and such holder has no arrangement
with any person to participate in the distribution of the new securities.
However, a broker-dealer who holds outstanding debt securities that were
acquired for its own account as a result of market-making or other trading
activities may be deemed to be an "underwriter" within the meaning of the
Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of the new
securities received by the broker-dealer in any such exchange. See "-- Resales
of Notes." The Company has not requested or obtained an interpretive letter from
the Commission staff with respect to this Exchange Offer, and the Company and
the Holders are not entitled to rely on interpretive advice provided by the
staff to other persons, which advice was based on the facts and conditions
represented in such letters. However, the Exchange Offer is being conducted in a
manner intended to be consistent with the facts and conditions represented in
such letters. If any Holder has any arrangement or understanding with respect to
the distribution of the Notes to be acquired pursuant to the Exchange Offer,
such Holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. In addition, each broker-dealer that receives Notes for its own
account in exchange for the Old Notes, where such Old Notes were acquired by
such broker-dealers as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Notes. See "Plan of Distribution." By delivering the
Letter of Transmittal, a Holder tendering Old Notes for exchange will represent
and warrant to the Company that the Holder is acquiring the Notes in the
ordinary course of its business and that the Holder is not engaged in, and does
not intend to engage in, a distribution of the Notes. Any Holder using the
Exchange Offer to participate in a distribution of the Notes to be acquired in
the Exchange Offer must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Holders who do not exchange their Old Notes pursuant to this
Exchange Offer will continue to hold Old Notes that are subject to restrictions
on transfer.
It is expected that the Notes will be freely transferable by the Holders
thereof, subject to the limitations described in the immediately preceding
paragraph and in "-- Resales of Notes." Sales of Notes acquired in the Exchange
Offer by Holders who are "affiliates" of the Company within the meaning of the
Securities Act will be subject to certain limitation on resale under Rule 144 of
the Securities Act. Such persons will only be entitled to sell Notes in
compliance with the volume limitations set forth in Rule 144, and sales of Notes
by affiliates will be subject to certain Rule 144 requirements as to the manner
of sale, notice and the availability
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of current public information regarding the Company. The foregoing is a summary
only of Rule 144 as it may apply to affiliates of the Company. Any such persons
must consult their own legal counsel for advice as to any restrictions that
might apply to the resale of their Notes.
The Notes otherwise will be substantially identical in all material
respects (including interest rate, maturity, security and restrictive covenants)
to the Old Notes for which they may be exchanged pursuant to this Exchange
Offer. See "Description of Notes."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth herein and in the
accompanying Letter of Transmittal, the Company will exchange $1,000 principal
amount of Notes for each $1,000 principal amount of its outstanding Old Notes.
Notes will be issued only in integral multiplies of $1,000 to each tendering
Holder of Old Notes whose Old Notes are accepted in the Exchange Offer.
The Notes will bear interest from and including the Original Issue Date.
Accordingly, Holders who receive Notes in exchange for Old Notes will forgo
accrued but unpaid interest on their exchanged Old Notes for the period from and
including the Original Issue Date to the date of exchange, but will be entitled
to such interest under the Notes.
As of May 13, 1997, $125.0 million aggregate principal amount of Old Notes
were outstanding. This Prospectus and the Letter of Transmittal are being sent
to all registered Holders of Old Notes as of that date. Tendering Holders will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Old Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than certain transfer taxes which may be imposed, in
connection with the Exchange Offer. See "-- Payment of Expenses."
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION
The Exchange Offer will expire at 5:00 P.M., New York City time, on June
16, 1997 subject to extension by the Company by notice to the Exchange Agent as
herein provided. The Company reserves the right to extend the Exchange Offer at
its discretion, in which event the term "Expiration Date" shall mean the time
and date on which the Exchange Offer as so extended shall expire. The Company
shall notify the Exchange Agent of any extension by oral or written notice and
shall mail to the registered holders of Old Notes an announcement thereof, each
prior to 9:00 A.M., New York City time, on the next business day after the
previously scheduled Expiration Date.
The Company reserves the right to extend or terminate the Exchange Offer
and not accept for exchange any Old Notes if any of the events set forth below
under "-- Conditions to the Exchange Offer" occur and are not waived by the
Company, by giving oral or written notice of such delay or termination to the
Exchange Agent. See "-- Conditions to the Exchange Offer." The rights reserved
by the Company in this paragraph are in addition to the Company's rights set
forth below under the caption "-- Conditions to the Exchange Offer."
PROCEDURES FOR TENDERING
The tender to the Company of Old Notes by a Holder thereof pursuant to one
of the procedures set forth below and the acceptance thereof by the Company will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
Except as set forth below, a holder who wishes to tender Old Notes for
exchange pursuant to the Exchange Offer must transmit a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth below
under "Exchange Agent" on or prior to the Expiration Date. In addition, either
(i) certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, or (ii) a timely
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confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if such procedure is available, into the Exchange Agent's account at The
Depository Trust Company pursuant to the procedure of book-entry transfer
described below, must be received by the Exchange Agent prior to the Expiration
Date, or (iii) the holder must comply with the guaranteed delivery procedures
described below. LETTERS OF TRANSMITTAL AND OLD NOTES SHOULD NOT BE SENT TO THE
COMPANY. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
Signatures on a Letter of Transmittal must be guaranteed unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered Holder of Old
Notes who has not completed the box entitled "Special Issuance and Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of any firm
that is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. (the "NASD") or a commercial
bank or trust company having an office in the United States (an "Eligible
Institution"). In the event that signatures on a Letter of Transmittal are
required to be guaranteed, such guarantee must be by an Eligible Institution.
The method of delivery of Old Notes and other documents to the Exchange
Agents is at the election and risk of the Holder, but if delivery is by mail it
is suggested that the mailing be made sufficiently in advance of the Expiration
Date to permit delivery to the Exchange Agent before the Expiration Date.
If the Letter of Transmittal is signed by a person other than a registered
Holder of any Old Note tendered therewith, such Old Note must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name or names of the registered Holder or Holders appear on the Old Note(s).
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes will be resolved by the Company,
whose determination will be final and binding. The Company reserves the absolute
right to reject any or all tenders that are not in proper form or the acceptance
of which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the right to waive any irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding. Unless waived, any irregularities in
connection with tenders must be cured within such time as the Company shall
determine. Neither the Company nor the Exchange Agent shall be under any duty to
give notification of defects in such tenders or shall incur liabilities for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the irregularities have not been cured or waived will be returned by the
Exchange Agent to the tendering Holder, unless otherwise provided in the Letter
of Transmittal, as soon as practicable following the Expiration Date.
The Company's acceptance for exchange of Old Notes tendered pursuant to the
Exchange Offer will constitute a binding agreement between the tendering person
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
BOOK ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Depository Trust Company for purposes of the Exchange
Offer within two business days after the date of this Prospectus, and any
financial institution that is a participant in the Depository Trust Company's
systems may make book-entry delivery of Old Notes by causing the Depository
Trust Company to transfer such Old Notes into the Exchange Agent's account at
the Depository Trust Company in accordance with such Depository Trust Company's
procedures for transfer. However, although delivery of Old Notes may be effected
through book-entry transfer at the Depository Trust Company, the Letter of
Transmittal or facsimile thereof with any required signature guarantees and any
other required documents must, in any case, be transmitted to and
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received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes, or a
Book-Entry Confirmation, as the case may be, and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within five New York Stock Exchange
trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to issue Notes
in respect of any properly tendered Old Notes not previously accepted, and may
terminate the Exchange Offer by oral or written notice to the Exchange Agent and
the Holders, or at its option, modify or otherwise amend the Exchange Offer, if
any material change occurs that is likely to affect the Exchange Offer,
including, but not limited to, the following:
(a) there shall be instituted or threatened any action or proceeding
before any court or governmental agency challenging the Exchange Offer or
otherwise directly or indirectly relating to the Exchange Offer or
otherwise affecting the Company;
(b) there shall occur any development in any pending action or
proceeding that, in the sole judgment of the Company, would or might (i)
have an adverse effect on the business of the Company, (ii) prohibit,
restrict or delay consummation of the Exchange Offer, or (iii) impair the
contemplated benefits of the Exchange Offer;
(c) any statute, rule or regulation shall have been proposed or
enacted, or any action shall have been taken by any governmental authority
which, in the sole judgment of the Company, would or might (i) have an
adverse effect on the business of the Company, (ii) prohibit, restrict or
delay consummation of the Exchange Offer, or (iii) impair the contemplated
benefits of the Exchange Offer; or
(d) there exists, in the sole judgment of the Company, any actual or
threatened legal impediment (including a default or prospective default
under an agreement, indenture or other instrument or obligation to which
the Company is a party or by which it is bound) to the consummation of the
transactions contemplated by the Exchange Offer.
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The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions. In addition, the Company may amend the Exchange Offer at
any time prior to 5:00 P.M., New York City time, on the Expiration Date if any
of the conditions set forth above occur. Moreover, regardless of whether any of
such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to the Holders.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in its reasonable discretion. Any
determination made by the Company concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will accept all Old Notes validly tendered prior to 5:00 P.M., New York
City time, on the Expiration Date. The Company will deliver Notes in exchange
for Old Notes promptly following the Expiration Date.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
or written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering Holders for the purpose of receiving the Notes. Under no
circumstances will interest be paid by the Company or the Exchange Agent by
reason of any delay in making such payment or delivery.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Old Notes will be returned, at the Company's
expense, to the tendering Holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn
(including the principal amount of such Old Notes), and (where certificates for
Old Notes have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing Holder. If certificates
for Old Notes have been delivered or otherwise identified to the Exchange Agent,
then, prior to the release of such certificates the withdrawing Holder must also
submit the serial numbers of the particular certificates to be withdrawn and a
signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such Holder is an Eligible Institution. If Old Notes have
been tendered to the procedure for book-entry transfer described above, any
notice of withdrawal must specify the name and number of the account at the
Depository Trust Company to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the Holder thereof without cost to such Holder (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depository Trust Company pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
the Depository Trust Company for the Old Notes) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under "-- Procedures for Tendering" above at any time on or prior to
the Expiration Date.
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FEDERAL INCOME TAX CONSEQUENCES
The Exchange Offer
In the opinion of Gibson, Dunn & Crutcher LLP, counsel to the Company, the
exchange of Old Notes for Notes pursuant to the Exchange Offer will not
constitute a material modification of the terms of either the Old Notes or the
Notes and, accordingly, such exchange will not constitute an exchange for
federal income tax purposes. Accordingly, such exchange will have no federal
income tax consequences to the Holders of the Old Notes, regardless of whether
such Holders participate in the Exchange Offer or not, and each Holder of Notes
will continue to be required to include interest on such Notes in its gross
income in accordance with such Holder's method of accounting for federal income
tax purposes. The Company intends, to the extent required, to take the position
described above.
The preceding discussion of the material United States federal income tax
consequences of the Exchange Offer is based on the Internal Revenue Code of
1986, as amended to the date hereof (the "Code"), existing and proposed Treasury
regulations, and judicial and administrative decisions, all of which are subject
to change at any time, possibly on a retroactive basis. This discussion relates
to Old Notes, and Notes received therefor, that are held as "capital assets"
within the meaning of Section 1221 of the Code by persons who are citizens or
residents of the United States. It does not discuss state, local or foreign tax
consequences, nor does it discuss tax consequences to categories of Holders that
are subject to special rules, such as foreign persons, tax-exempt organizations,
insurance companies, banks and dealers in stocks and securities. Federal income
tax consequences may vary depending on the particular status of an investor. No
rulings will be sought from the Internal Revenue Service ("IRS") with respect to
the federal income tax consequences of the Exchange Offer.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MIGHT BE RELEVANT TO AN INVESTOR'S DECISION TO PARTICIPATE IN THE
EXCHANGE OFFER. EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR CONCERNING THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR
SITUATION BEFORE DETERMINING WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER.
Backup Withholding
Under the Code, a Holder of a Note may be subject, under certain
circumstances, to "backup withholding" at a 31% rate with respect to payments of
interest thereon or the gross proceeds from the disposition thereof. This
withholding generally applies only if the Holder (i) fails to furnish his or her
social security number or other taxpayer identification number ("TIN") within a
reasonable time after request therefor, (ii) furnishes an incorrect TIN, (iii)
is notified by the IRS that he or she has failed to report properly payments of
interest and dividends and the IRS has notified the Company that he or she is
subject to backup withholding or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that the TIN
provided is his or her correct number and that he or she is not subject to
backup withholding. Any amount withheld from a payment to a Holder under the
backup withholding rules is allowable as a credit against such Holder's federal
income tax liability, provided that the required information is furnished to the
IRS. Corporations and certain other entities described in the Code and Treasury
regulations are exempt from such withholding if their exempt status is properly
established.
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EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. All correspondence in connection with the Exchange Offer and the Letter
of Transmittal should be addressed to the Exchange Agent as follows:
By Hand Delivery, Mail or Overnight Express
(Insured or registered recommended): By Facsimile:
The Bank of New York (212) 571-3080
101 Barclay Street
New York, New York 10286
By Telephone:
Attention: Reorganization Department-7E (212) 815-5920
Requests for additional copies of the Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent or the Company.
PAYMENT OF EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company,
however, will pay reasonable and customary fees and reasonable out-of-pocket
expenses to the Exchange Agent in connection therewith. The Company will also
pay the cash expenses to be incurred by it in connection with the Exchange
Offer, including accounting, legal, printing, and related fees and expenses.
ACCOUNTING TREATMENT
The Notes will be recorded at the same carrying value as the Old Notes, as
reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
Company's expenses of the Exchange Offer will be capitalized for accounting
purposes.
RESALES OF NOTES
With respect to resales of Notes, based on certain interpretive letters
issued by the staff of the Commission to third parties, the Company believes
that a Holder of Notes (other than (i) a broker-dealer who purchases such Notes
directly from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person who is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act) who exchanged
Old Notes for Notes in the ordinary course of business and who is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the Notes,
will be allowed to resell the Notes to the public without further registration
under the Securities Act and without delivering to the purchasers of the Notes a
prospectus that satisfies the requirements of the Securities Act. However, a
broker-dealer who holds Old Notes that were acquired for its own account as a
result of market making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act. If any
other Holder is deemed to be an "underwriter" within the meaning of the
Securities Act or acquires Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the Notes, such holder must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. For a period of one year
from the Expiration Date, the Company will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
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ACQUISITION AND FINANCINGS
On October 30, 1996, the Initial Investcorp Group acquired (the
"Acquisition") from Carmel, a trust governed by the laws of Canada, a 51%
interest in Holdings for $105.0 million in cash. Holdings holds 100% of the
capital stock of the Company. A corporation in which an affiliate of Investcorp
holds a minority interest also purchased $40.0 million aggregate principal
amount of Holdings Notes for $40.0 million in cash. Holdings in turn purchased
$40.0 million of preferred stock of the Company. The Company then borrowed
$100.0 million under the Senior Credit Facility, which was used by Holdings,
together with the proceeds from the sale of the Old Notes and the sale of $40.0
million of Holdings Notes, following a dividend to Holdings by the Company, to
redeem the stock of Holdings held by Carmel for $238.5 million. Carmel then
purchased from Holdings for $100.9 million a 49% interest in Holdings. An
affiliate of Carmel purchased $10.0 million aggregate principal amount of
Holdings Notes, and Holdings in turn purchased $10.0 million of preferred stock
of the Company. The Company then repaid amounts outstanding under the Prior
Credit Agreement (as defined herein), which was terminated, paid $9.9 million to
members of management pursuant to a previously existing employee incentive plan
and incurred additional expenses of $22.7 million related to the foregoing. The
foregoing transactions other than the Acquisition are collectively referred to
as the "Financings." Following the Acquisition and Financings, the Initial
Investcorp Group owns a 51% common equity interest in Holdings, a corporation in
which an affiliate of Investcorp holds a minority interest owns $40.0 million
aggregate principal amount of Holdings Notes, Carmel owns a 49% common equity
interest in Holdings and an affiliate of Carmel owns $10.0 million aggregate
principal amount of Holdings Notes. Holdings owns 100% of the common equity and
$50.0 million of preferred stock of the Company. The Initial Investcorp Group
controls a majority of the Company's Board of Directors. Simultaneously with the
closing of the Acquisition and Financings, Carmel, the Initial Investcorp Group,
Holdings and the Company entered into a stockholders' agreement with respect to
the voting and, in certain circumstances, the disposition of the shares of
capital stock of Holdings. See "Use of Proceeds" and "Principal Stockholders."
25
27
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 2, 1997. This table should be read in conjunction with "Description of
Notes," "Credit Agreement" and the Consolidated Financial Statements of the
Company and the Notes thereto included elsewhere in this Prospectus.
(IN THOUSANDS)
Cash and cash equivalents...................................................... $ 5,223
========
Long-term debt (including current portion):
Senior Credit Facility(1).................................................... $ 138,000
Notes........................................................................ 125,000
Capital lease obligations.................................................... 22,680
--------
Total long-term debt................................................. 285,680
--------
Stockholder's deficit:
Redeemable preferred stock(2)................................................ 1
Common stock................................................................. 1
Additional paid-in capital(2)................................................ 1,501
Receivable from stockholder(3)............................................... (5,966)
Accumulated deficit.......................................................... (52,243)
--------
Total stockholder's deficit.......................................... (56,706)
========
Total capitalization................................................. $ 228,974
========
- ---------------
(1) The Senior Credit Facility provides for a $100.0 million term loan and a
$100.0 million revolving loan credit facility. At February 2, 1997, $100.0
million was outstanding under the term loan and $38.0 million was
outstanding under the revolving loan credit facility.
(2) In connection with the Acquisition and Financings, the Company issued $50.0
million of redeemable preferred stock to Holdings. The preferred stock is
recorded net of a $4.0 million fee directly associated with the cost of
issuance.
(3) Represents a receivable from Carmel to recognize Carmel's commitment to fund
a portion of the Company's obligation under its existing equity
participation program. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Effect of the Acquisition
and Financings" and "Management -- Equity Participation Agreements."
26
28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed financial data (the "Pro Forma
Financial Data") has been prepared by the Company's management from the
Consolidated Financial Statements of the Company and the Notes thereto included
elsewhere in this Prospectus. The unaudited pro forma condensed statement of
operations for the fiscal year ended February 2, 1997 reflects adjustments as if
the Acquisition and Financings had been consummated and were effective as of the
beginning of fiscal 1996. See "Acquisition and Financings" and "Use of
Proceeds."
The financial effects of the Acquisition and Financings as presented in the
Pro Forma Financial Data are not necessarily indicative of the Company's results
of operations which would have been obtained had the Acquisition and Financings
actually occurred on the date described above, nor are they necessarily
indicative of the results of future operations. The Pro Forma Financial Data
should be read in conjunction with the notes thereto, which are an integral part
thereof, the Consolidated Financial Statements of the Company and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED FEBRUARY 2, 1997
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS)
Net sales............................................. $ 793,092 -- $ 793,092
Cost of sales......................................... 463,374 -- 463,374
---------- ----------- ---------
Gross profit.......................................... 329,718 -- 329,718
Operating and administrative expenses................. 298,004 $ 750(1) 298,754
Store closing costs................................... 14,904 -- 14,904
Acquisition charge -- equity participation
agreements.......................................... 20,174 (20,174)(2) --
---------- ----------- ---------
Income (loss) from operations......................... (3,364) (19,424) 16,060
Other Acquisition and Financings fees................. 12,463 (12,463)(2) --
Interest expense...................................... 19,025 13,109(3) 32,134
---------- ----------- ---------
Income (loss) before provision for taxes.............. (34,852) (18,778) (16,074)
Provision (benefit) for income taxes.................. (11,318) 6,098(4) (5,220)
---------- ----------- ---------
Net income (loss)..................................... $ (23,534) $ (12,680) $ (10,854)
======== ========= ========
Other Data:
EBITDA(5)........................................... $ 50,544 -- $ 50,544
EBITDAR(5).......................................... 98,450 -- 98,450
Ratio of earnings to fixed charges(6)............... -- -- --
See accompanying notes to the unaudited pro forma condensed statements of
operations.
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29
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Represents amortization of management fees to be incurred under the
Management Agreement (as defined herein). See "Certain Transactions."
(2) Amounts hereunder reflect certain non-recurring charges which were incurred
in October 1996 when the Acquisition and Financings were consummated,
including the following: (i) amounts paid to members of management pursuant
to an existing employee incentive plan of $19.9 million ($20.2 million
including a provision for estimated payroll taxes thereon), and (ii)
expenses incurred in connection with the Acquisition and Financings of $12.5
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Effect of Acquisition and Financings" and
"Management -- Equity Participation Agreements."
(3) The interest expense adjustment is as follows (in thousands):
FISCAL YEAR
ENDED
FEBRUARY 2,
1997
-----------
Historical interest on Prior Credit Agreement............... $(7,104)
Amortization of deferred financing fees recorded as bank
interest.................................................. (950)
Interest expense on the Senior Credit Facility and the
Notes:
Interest expense on the Senior Credit Facility assuming a
composite interest rate of 9.0%........................ 9,042
Interest expense on the Notes at an interest rate of
11%.................................................... 10,313
Amortization of deferred financing fees for the Senior
Credit Facility and Notes................................. 1,808
-------
Total interest expense adjustment................. $13,109
=======
(4) Represents the tax effect of the foregoing adjustments.
(5) EBITDA represents income before net interest expense, provision for income
taxes, depreciation and amortization expense, other non-cash charges,
extraordinary items and non-recurring charges and has been calculated in
accordance with the terms of the Indenture. 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 to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditures and working capital requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EBITDAR represents EBITDA plus operating lease rental expense. As the
Company leases substantially all of its stores, EBITDAR permits a more
meaningful measure of operations before occupancy expense, since the
proportion of stores leased versus owned varies among the industry
competitors.
(6) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs, and one-third of lease expense, which management believes
is representative of the interest component of lease expense. For fiscal
1996, earnings were insufficient to cover fixed charges by $34.9 million. On
a pro forma basis, for fiscal 1996, earnings were insufficient to cover
fixed charges by $16.1 million. Accordingly, such ratios have not been
presented.
28
30
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated statement of
operations, balance sheet and operating data of the Company. The selected
statement of operations and balance sheet data for the fiscal year ended
February 2, 1997 are derived from the Consolidated Financial Statements of the
Company, which have been audited by Coopers & Lybrand L.L.P., independent
accountants, and appear elsewhere herein. The selected statement of operations
and balance sheet data for each of the four fiscal years during the period ended
January 28, 1996 are derived from the financial statements of the Company, which
have been audited by Price Waterhouse LLP, independent accountants, and which,
in the case of fiscal years 1994 and 1995, appear elsewhere herein. The data
presented below should be read in conjunction with the Consolidated Financial
Statements, including the related Notes thereto included herein, the other
financial information included herein and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
FISCAL YEAR ENDED(1)
------------------------------------------------------------
JAN. 31, JAN. 30, JAN. 29, JAN. 28, FEB. 2,
1993 1994 1995(2) 1996(3) 1997(4)
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SQUARE FOOT DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $588,984 $645,426 $688,135 $718,352 $793,092
Cost of sales............................................. 363,514 397,565 410,358 433,817 463,374
Operating and administrative expenses..................... 211,553 233,785 255,922 281,387 298,004
-------- -------- -------- -------- --------
Store closing costs....................................... 943 3,526 2,678 3,310 14,904
Acquisition charge -- equity participation agreements..... -- -- -- -- 20,174
Operating profit (loss)................................... 12,974 10,550 19,177 (162) (3,364)
Other Acquisition and Financings expenses................. -- -- -- -- 12,463
Interest expense.......................................... 12,362 11,731 10,343 14,379 19,025
-------- -------- -------- -------- --------
Income (loss) before taxes and extraordinary gain......... 612 (1,181) 8,834 (14,541) (34,852)
Income tax (benefit) expense.............................. -- (531) 796 (5,447) (11,318)
-------- -------- -------- -------- --------
Income (loss) before extraordinary gain................... 612 (650) 8,038 (9,094) (23,534)
Extraordinary gain........................................ -- -- 97,186 -- --
-------- -------- -------- -------- --------
Net income (loss)......................................... $ 612 $ (650) $105,224 $ (9,094) $(23,534)
-------- -------- -------- -------- --------
OTHER DATA:
EBITDA(5)................................................. $ 25,962 $ 22,726 $ 32,282 $ 16,099 $ 50,544
EBITDAR(5)................................................ 60,922 58,595 70,964 61,453 98,450
Capital expenditures...................................... 5,031 14,910 14,597 11,640 6,317
Commercial sales(6)....................................... 7,531 18,602 32,630 60,840 89,551
Warehouse and distribution expense (as a percentage of net
sales)(7)............................................... 4.1% 4.0% 4.3% 4.9% 3.8%
Net cash provided by (used in) operating activities....... 10,481 17,569 15,120 (3,361) (38,366)
Net cash (used in) investing activities................... (4,582) (14,943) (18,983) (7,888) (10,686)
Net cash provided by (used in) financing activities....... (4,503) 227 (5,383) 12,743 49,911
Ratio of earnings to fixed charges(8)..................... 1.0x -- 1.3x -- --
SELECTED ADDITIONAL OPERATING DATA:
Total store square footage (at period end) (000s)(9)...... 2,789 2,992 3,097 3,329 3,631
Average net sales per store(9)............................ $ 1,098 $ 1,215 $ 1,272 $ 1,294 $ 1,384
Average net sales per store square foot(9)................ $ 207 $ 223 $ 226 $ 224 $ 228
Percentage increase (decrease) in comparable store net
sales(10)............................................... 14.3% 9.9% 5.2% 2.1% 5.9%
Stores open at end of period.............................. 524 538 544 566 580
AS OF
------------------------------------------------------------
JAN. 31, JAN. 30, JAN. 29, JAN. 28, FEB. 2,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Net working capital....................................... $ 77,528 $ 78,003 $ 77,627 $ 81,048 $121,157
Total assets.............................................. 275,782 294,806 350,830 391,319 439,543
Current liabilities....................................... 124,688 140,115 174,924 203,754 196,901
Total debt (including current maturities)................. 186,377 187,807 105,601 122,003 285,680
Stockholder's equity (deficit)............................ (44,626) (41,576) 64,376 59,997 (56,706)
29
31
- ---------------
(1) The Company's fiscal year consists of 52 or 53 weeks ending on the Sunday
nearest to January 31. All fiscal years presented are 52 weeks except for
the fiscal year ended February 2, 1997 which consists of 53 weeks.
(2) Net income in fiscal 1994 includes an extraordinary gain of $97.2 million
resulting from cancellation of a portion of the Company's long-term debt.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes 5 and 11 to Consolidated Financial
Statements.
(3) Results of operations in fiscal 1995 include the following non-recurring
items: (i) cost of sales includes preopening expenses of $1.6 million
associated with the opening of the new distribution center in Phoenix,
Arizona, and (ii) operating and administrative expenses include $5.3
million of non-recurring software development costs associated with the new
store-level information systems installed by the Company during fiscal
1995. In addition, the Company believes that its operations and operating
results were adversely impacted during fiscal 1995 as a result of the
implementation and installation of many new initiatives.
(4) Amounts hereunder reflect certain non-recurring charges which were incurred
in October 1996 when the Acquisition and Financings were consummated,
including the following: (i) amounts to be paid to members of management
pursuant to an existing employee incentive plan of $19.9 million ($20.2
million including a provision for estimated payroll taxes thereon), of
which one half was paid in October 1996 (the remaining balance will be paid
in October 1997), and (ii) expenses incurred in connection with the
Acquisition and Financings of $12.5 million. Amounts hereunder also include
a charge of $12.9 million for store relocations to be undertaken because of
the Company's improved access to funding as a result of the Real Estate
Agreement (as defined herein). See "Management -- Equity Participation
Agreements," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 12 to Consolidated Financial
Statements.
(5) EBITDA represents income before net interest expense, provision for income
taxes, depreciation and amortization expense, other non-cash charges
(including the $12.9 million charge described in Note 4 above),
extraordinary items and non-recurring charges and has been calculated in
accordance with the terms of the Indenture. While EBITDA is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles ("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 to provide additional information with respect
to the ability of the Company to meet its future debt service, capital
expenditure and working capital requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The computation of EBITDA for each of the respective periods shown is as
follows (in thousands):
JAN. 31, JAN. 30, JAN. 29, JAN. 28, FEB. 2,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
gain...................... $ 612 $(1,181) $ 8,834 $(14,541) $(34,852)
Plus: Interest expense............ 12,362 11,731 10,343 14,379 19,025
Depreciation and
amortization.............. 12,988 12,176 13,105 16,261 19,225
Non-recurring Acquisition
and Financings charges and
fees...................... -- -- -- -- 32,637
Other non-recurring and
other non-cash charges.... -- -- -- -- 14,509
------- ------- ------- -------- --------
Total: $25,962 $22,726 $32,282 $ 16,099 $ 50,544
======= ======= ======= ======== ========
EBITDAR represents EBITDA plus operating lease rental expense. As the
Company leases substantially all of its stores, EBITDAR permits a more
meaningful measure of operations before occupancy expense, since the
proportion of stores leased versus owned varies among the industry
competitors.
(6) Represents sales to commercial customers, including sales from the
Company's Commercial Sales Centers.
(7) Warehouse and distribution expense is included in cost of sales.
(8) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs, and one-third of lease expense, which management believes
is representative of the interest component of lease expense. For fiscal
years 1993, 1995 and 1996, earnings were insufficient to cover fixed
charges by $1.2 million, $14.5 million and $34.9 million, respectively.
Accordingly, such ratios have not been presented.
30
32
(9) Total store square footage is based on the Company's actual store formats
which include normal selling, office, stockroom and receiving space.
Average net sales per store and average net sales per store square foot are
based on the average of beginning and ending number of stores and store
square footage and are not weighted to take into consideration the actual
dates of store openings, closings or expansions.
(10) Comparable store net sales data is calculated based on the change in net
sales commencing after the time a new store has been opened twelve months.
The first twelve months a new store is open are not included in the
comparable store calculation. Relocations are included in comparable store
net sales from the date of opening.
31
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements of the Company, the Notes thereto and other data and information
appearing elsewhere in this Prospectus. Certain statements under this caption
may constitute "forward-looking statements" under the Reform Act which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
under the caption "Risk Factors". The Company's fiscal year ends on the Sunday
nearest January 31. As used in this section, fiscal 1996 represents the 53 weeks
ended February 2, 1997; fiscal 1995 represents the 52 weeks ended January 28,
1996; fiscal 1994 represents the 52 weeks ended January 29, 1995; fiscal 1993
represents the 52 weeks ended January 30, 1994 and fiscal 1992 represents the 52
weeks ended January 31, 1993.
GENERAL
The Company is the largest retailer of automotive parts and accessories in
the Western United States and one of the largest such retailers in the United
States. As of February 2, 1997, the Company operated 580 stores as a fully
integrated chain under three tradenames, each of which at one time represented a
separate retail chain: Checker Auto Parts, founded in 1968 and operating in the
Southwestern and Rocky Mountain states; Schuck's Auto Supply, founded in 1917
and operating in the Pacific Northwest; and Kragen Auto Parts, founded in 1947
and operating primarily in California. In December 1986, the Checker Auto Parts
and Kragen Auto Parts chains were acquired from Lucky Stores and were combined
in 1987 with Schuck's to form the Company.
From the formation of the Company in 1987, the Company's results of
operations have been adversely impacted by a high degree of financial leverage.
As a result, during fiscal 1991, the Company engaged in protracted negotiations
with its then bank lenders because of the potential of a default under its then
existing credit agreement. This, in turn, resulted in the restriction of
shipments by certain of the Company's vendors. These vendor restrictions
resulted in the fill-rate to stores (the percentage of weekly store orders
filled by the Company's warehouses that week, which is currently targeted at
95%) falling to as low as 50% during portions of fiscal 1991. These developments
caused further erosion of the Company's results of operations and liquidity,
culminating in a restructuring of the Company's then existing credit agreement
in fiscal 1992 and in the cancellation of indebtedness of $97.2 million in
fiscal 1994. The resulting reduction in financial leverage enabled the Company,
in fiscal 1995, to refinance its then remaining bank indebtedness. During fiscal
1996, the Company consummated the Acquisition and Financings which are discussed
in greater depth below. See Notes 2 and 5 to Consolidated Financial Statements.
Beginning in fiscal 1994, the Company initiated a strategic review of its
operations in order to improve its operating results, enhance customer service,
improve the efficiency of its operations and prepare the Company for accelerated
growth. In connection with this program, the Company designed and implemented a
sophisticated, centralized infrastructure, installed various store-level
information systems, initiated its Commercial Sales Program and accelerated its
store expansion and repositioning programs to increase the penetration of its
existing markets. Implementation of these initiatives involved large
expenditures, including approximately $51.3 million of capital and operating
expenditures, and caused certain operating inefficiencies, which adversely
impacted operating results during fiscal 1995. However, the Company believes
these initiatives have provided significant momentum to the Company's operations
and have enabled the Company to significantly improve its operating results
during fiscal 1996. During fiscal 1996, the Company's net sales increased to
$793.1 million from $718.4 million in fiscal 1995 and its EBITDA increased to
$50.5 million in 1996 from $16.1 million in fiscal 1995.
EFFECT OF THE ACQUISITION AND FINANCINGS
As a result of the Acquisition and Financings, the Company incurred
approximately $12.5 million in fees and charges which were expensed in the
fourth quarter of 1996 when the Acquisition and Financings were
32
34
consummated. Such expenses were comprised of advisory and financing fees and
expenses of approximately $11.5 million and an accrual for financing fees to an
affiliate of Carmel of $1.0 million, which will be paid in March 1998.
In addition, the Company became obligated to certain members of its
management in the amount of approximately $19.9 million under its existing
equity participation program. The Company expensed this full amount plus a
provision for estimated payroll taxes thereon during the fourth quarter of
fiscal 1996 when the Acquisition and Financings were consummated and paid $9.9
million (50% of the total obligation) with proceeds from the Financings. The
Company will pay the remaining approximately $10.0 million on or about October
30, 1997, and Carmel will reimburse the Company for 60% (the estimated after-tax
cost to the Company) of the amount of such remaining payment. The Company will
not recognize any additional expense related to the equity participation payment
after the initial charge incurred in the fourth quarter of fiscal 1996.
In order to recognize Carmel's commitment to fund the second payment, the
Company has recorded a $6.0 million capital contribution and corresponding
receivable from stockholder. The Company has also recognized a liability of
$10.0 million for such amount.
There was no change to the Company's historical carrying value of assets
and liabilities as a result of the Acquisition and Financings, as purchase
accounting was not applicable to the Acquisition. See "Acquisition and
Financings."
As a result of the Acquisition and Financings, the Company's liabilities
for borrowed funds increased by approximately $131.9 million and its borrowing
capacity increased by approximately $100 million. As a result of its increased
borrowings, the Company's interest expense will be substantially higher in the
future than in recent past fiscal years. Company management believes, but can
provide no assurance, that future profitability can be achieved through
continued growth in same store sales, continued growth in the Commercial Sales
Program, continued improvement in the realization of operating expense
reductions through increased efficiency and expansion of the existing store
base.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data for the
Company expressed as a percentage of net sales for the fiscal years indicated.
FISCAL YEAR ENDED
------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2,
1995 1996 1997
----------- ----------- ------------
Net sales............................... 100.0% 100.0% 100.0%
Cost of sales........................... 59.6 60.4 58.4
----- ----- -----
Gross profit............................ 40.4 39.6 41.6
Operating and administrative expenses... 37.2 39.1 37.6
Store closing costs..................... 0.4 0.5 1.9
Acquisition charge -- equity
participation agreements.............. -- -- 2.5
----- ----- -----
Operating profit (loss)................. 2.8 0.0 (0.4)
Acquisition fees........................ -- -- 1.6
Interest expense........................ 1.5 2.0 2.4
Income tax expense (benefit)............ 0.1 (0.7) (1.6)
----- ----- -----
Income (loss) before extraordinary
gain.................................. 1.2 (1.3) (2.8)
Extraordinary gain...................... 14.1 -- --
----- ----- -----
Net income (loss)....................... 15.3% (1.3)% (2.8)%
===== ===== =====
Gross profit consists primarily of net sales less the cost of sales and
warehouse and distribution expenses. Gross profit as a percentage of net sales
may be affected by variations in the Company's product mix, price changes in
response to competitive factors and fluctuations in merchandise costs and vendor
programs.
33
35
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 Year Ended February 2, 1997 Compared to Fiscal Year Ended January 28,
1996
Net sales for fiscal 1996 increased by $74.7 million, or 10.4%, over net
sales for fiscal 1995. This increase was due to an increase in comparable store
sales of 5.9%, or $42.5 million, and an increase in net sales from new stores of
$32.2 million. The Company believes its comparable store sales have benefitted
from the installation of its new store-level information systems, implementation
of its Commercial Sales Program, its store relocation program and its expanded
Priority Parts operations. Sales to commercial customers increased to $89.6
million for fiscal 1996 from $60.8 million for fiscal 1995. During 1996, the
Company opened 19 new stores, relocated 37 stores to larger facilities and
expanded eight stores at existing locations and closed five stores in addition
to relocations.
Gross profit for fiscal 1996 was $329.7 million or 41.6% of net sales,
compared with $284.5 million, or 39.6% of net sales during fiscal 1995. The
increase in gross profit percentage resulted from an increase in the sales of
automotive hard parts which produce a higher gross profit percentage than other
product categories. Gross profit was also favorably impacted due to efficiencies
gained from the Company's new warehouse and distribution systems which became
fully operational in the fourth quarter of fiscal 1995 (see "Business --
Warehouse and Distribution"). Warehouse and distribution costs declined as a
percentage of sales to 3.8% for fiscal 1996 from 4.9% for fiscal 1995. The
Company believes that it has been able to obtain better pricing from its vendors
as a result of improvement in its financial performance and access to credit
during fiscal 1996. These favorable factors were slightly offset in fiscal 1996
by the lower gross margins on commercial sales as compared to retail sales.
Operating and administrative expenses for fiscal 1996 increased by $16.6
million over such expenses for fiscal 1995 but, as a percentage of net sales,
decreased to 37.6% from 39.1%. This decrease reflects the Company's ability to
leverage its overhead and fixed expenses with higher sales volume despite an
increase of approximately $3.0 million in depreciation and amortization expense
associated with the equipment installed as part of its investment in store-based
information systems.
In January 1997, the Company updated its strategic plan relating to the
relocation of certain stores. As a result of the Acquisition and Financings, the
Company has greater access to capital resources and availability of a
sale-leaseback facility for new stores, improving the Company's ability to
implement such relocations. While management believes that there will be
long-term operating benefits from this strategy, the Company will incur costs
for early lease terminations or negative sub-lease rentals for stores vacated
under this plan and, accordingly, a charge to earnings of $12.9 million was
recorded in January 1997 which increased the provision for store closing costs
to $14.9 million for fiscal 1996 from $3.3 million for fiscal 1995.
In satisfaction of all Company obligations under certain pre-existing
equity participation agreements with members of management which arose due to
the Acquisition and Financings, the Company recorded a charge of approximately
$20.2 million in the fourth quarter of fiscal 1996. (See Note 2 to the
Consolidated Financial Statements.) In addition, the Company incurred
non-recurring Acquisition and Financings fees totaling $12.5 million which
consisted primarily of consulting, legal and accounting fees.
Interest expense for fiscal 1996 was $19.0 million compared to $14.4
million for fiscal 1995. The increase in interest expense was the result of
higher average effective interest rates and the issuance of approximately $131.9
million of new debt in connection with the Acquisition and Financings.
As a result of the above factors, a net loss of $23.5 million was recorded
for fiscal 1996 as compared to a net loss of $9.1 million for fiscal 1995.
34
36
Fiscal Year Ended January 28, 1996 Compared to Fiscal Year Ended January 29,
1995
Net sales for fiscal 1995 increased by $30.2 million, or 4.4%, over net
sales for fiscal 1994. This increase was due to an increase in net sales from
new stores ($16.1 million) and an increase in comparable store sales of 2.1%
($14.1 million). Comparable stores sales growth was lower than in previous years
primarily because of difficulties relating to hardware and software installed
during the conversion and automation of the Company's two distribution centers,
which caused fill-rates to decline from targeted levels of approximately 95% to
as low as 65% during portions of fiscal 1995. This, in turn, resulted in stores
being out of stock with respect to certain products during portions of fiscal
1995. The results were further adversely impacted by weak economic conditions in
the Company's California markets. Comparable store sales growth was positively
impacted by an increase in the number of relocated stores in fiscal 1995.
Commercial sales were $60.8 million in fiscal 1995 compared to $32.6 million in
fiscal 1994. During fiscal 1995, the Company opened 24 new stores and relocated
30 stores, expanded nine stores at existing locations and closed a total of two
stores in addition to relocations. Fill-rates by year end had improved to
approximately 90%.
Gross profit for fiscal 1995 was $284.5 million, or 39.6% of net sales,
compared with $277.8 million, or 40.4% of net sales, during fiscal 1994. The
decrease in gross profit percentage was due primarily to an increase in
warehouse and distribution costs of 0.6% of net sales resulting from the
additional costs incurred (including $1.6 million of pre-opening expenses)
during the automation of the Company's distribution centers and related
difficulties of such automation. The new distribution facilities became fully
operational in the fourth quarter of fiscal 1995 See "Business -- Warehouse and
Distribution".
Operating and administrative expenses for fiscal 1995 increased by $25.5
million over such expenses for fiscal 1994 and, as a percentage of net sales,
increased from 37.2% to 39.1%. The increase in the expense ratio for fiscal 1995
was primarily attributable to the expenses associated with developing and
implementing the store-based information systems including the new POS system,
integration of the POS with the Electronic Parts Catalog ("EPC"), implementation
of a Retail Paperless Management System and installation of a store-wide
satellite communications network, in the aggregate amount of $6.8 million of
which $5.3 million represents non-recurring software development costs and $1.5
million represents an increase in depreciation and amortization expense
associated with equipment installed as part of the investments in store-based
systems. In addition to the direct costs incurred by the Company to develop and
implement these new systems, the Company's store associates were required to
spend a significant amount of time off the sales floor being trained on the use
of these systems, resulting in an increase in store labor during the period. The
Company's out-of-stock position during periods of fiscal 1995 also contributed
to the higher store labor costs as a percentage of net sales as associates were
forced to direct more of their efforts to outsourcing product. Lastly, during
fiscal 1995, the Company expanded its Commercial Sales Centers from 59 to 176
stores. This expansion caused store labor costs to increase as a percentage of
net sales due to the increased store labor costs required to service commercial
customers and the lower level of sales generated by new Commercial Sales Centers
during their start-up phase. As a result, store labor increased by $9.0 million
during fiscal 1995 over fiscal 1994 and, as a percentage of net sales, increased
to 12.7% from 12.0%. The increase in such expenses was offset in part by a
reduction in advertising costs of $4.9 million resulting from the Company
limiting its advertising in response to its reduced in-stock position during
portions of the fiscal year. Store closing costs increased to $3.3 million in
fiscal 1995 compared to $2.7 million for fiscal 1994.
Interest expense for fiscal 1995 was $14.4 million compared to $10.3
million for fiscal 1994. The increase in interest expense was the result of
higher average borrowings and increases in the LIBOR interest rate.
The Company recorded an income tax benefit of $5.4 million in fiscal 1995.
The Company's effective tax rate for fiscal 1994 was 9.0%. See Note 11 to
Consolidated Financial Statements.
As a result of the above factors, the Company incurred a net loss of $9.1
million in fiscal 1995 as compared to net income before extraordinary gain of
$8.0 million in fiscal 1994.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs have been for the funding of working
capital requirements (primarily inventory) and leasehold improvements associated
with its store repositioning and expansion program, the automation and fixturing
of its distribution centers, the development and roll-out of its store-based
information systems, the expansion of its Commercial Sales Program and the
increase in the number of hard parts SKU's in its stores. Prior to the
Acquisition and Financings the Company had financed its growth and
infrastructure investments primarily through internally generated funds, funds
borrowed under its previous credit agreement, funds obtained from an affiliate
of Carmel in connection with sale-leaseback and other transactions and lease
arrangements with third parties.
The Company believes it has sufficient liquidity to fund its debt service
obligations and implement its growth strategy. In addition to its operating cash
flow, the Company has access to a $50.0 million off-balance sheet revolving
lease facility provided by Transatlantic Finance, Ltd. ("Transatlantic"), an
affiliate of Carmel, to support the Company's new store expansion and store
relocation program. Pursuant to this facility, Transatlantic, or one or more of
its affiliates (each, a "Funding Company" and, collectively, the "Funding
Companies") will acquire and develop the land and buildings for sites selected
by the Company. Such Funding Company will then lease the facilities to the
Company on an operating lease basis, with rents beginning to be paid at the
earlier of the opening of the new store or six months after acquisition of the
property (the "Base Term Commencement Date") (the Company has typically opened
stores within three months of acquisition of a property). The Funding Company
intends to sell the assets and associated leases to third parties, thereby
replenishing the Company's availability under the facility. The Company's
initial basic annual rent with respect to a property will be based upon (i) the
30-year treasury rate at the earlier of the Base Term Commencement Date or the
date that the Funding Company resells the lease, plus 400 basis points, and (ii)
the Funding Company's cost to acquire and develop such property (including,
without limitation, real estate taxes and operating costs incurred during
construction, together with interest thereon at The Chase Manhattan Bank, N.A.'s
prime rate plus 200 basis points). If the Funding Company is unable to resell
the lease prior to the Base Term Commencement Date, it can adjust the rate by up
to 200 basis points if requested by the third-party purchaser in order to
conform the terms of such lease to the then-current market terms. Historically,
the Company has generally been able to lease stores under similar arrangements
based upon the applicable treasury rate plus 400 basis points or less. The
Company believes that this facility will provide the capital necessary to meet
its store growth and relocation plans for the foreseeable future. The terms of
the facility were set in the arm's-length negotiations leading to the
Acquisition, and the Company believes such terms to be as favorable to it as
could be obtained from unaffiliated third parties. The facility may be
terminated at the option of the Company or Carmel upon, among other things, the
occurrence of any initial public offering of any class of the Company's equity
securities or upon the making of a material beneficial modification to the
Senior Credit Facility. See "Certain Transactions."
In addition, in connection with the Acquisition and Financings, the Company
entered into the Senior Credit Facility which provides for (i) a $100.0 million
term loan, which was drawn down at the closing of the Acquisition and Financings
and (ii) a revolver with maximum borrowings of approximately $100.0 million,
none of which was drawn down in connection with the Acquisition and Financings.
The loans under the Senior Credit Facility are collateralized by a first
priority security interest in substantially all the personal property of the
Company. Holdings also issued a guarantee of the loans under the Senior Credit
Facility, which guarantee is collateralized by a pledge by Holdings of all
issued and outstanding capital stock of the Company. Each of the U.S.
subsidiaries of the Company also issued a guarantee under the Senior Credit
Facility which is collateralized by a first priority security interest in
substantially all personal property of such subsidiary, and the Company pledged
the issued and outstanding capital stock of each such subsidiary owned by the
Company to collateralize indebtedness under the Senior Credit Facility. Amounts
available to the Company under the revolver are subject to a borrowing base
formula which is based upon certain percentages of the Company's inventories.
The Company intends to use borrowings under the revolver for working capital
purposes, including potentially to reduce its accounts payable on a selected
basis, in an effort to obtain substantially better pricing and terms from its
vendors in connection with such paydowns. The Company believes that it can
obtain lower pricing from its vendors by reducing its accounts payable,
including (i) negotiating discounts on amounts
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currently owed; (ii) capitalizing on cash discounts currently available in its
existing vendor agreements; and (iii) negotiating lower prices in return for
quicker payment in the future.
Historically, the Company has negotiated extended payment terms from
suppliers to finance much of its inventory growth, and the Company believes that
it will be able to continue financing much of its inventory growth through such
extended payment terms. The Company anticipates that inventory levels will
continue to increase primarily as a result of new store openings.
In fiscal 1994, net cash provided by operating activities was $15.1
million. Of this amount, $8.0 million was provided by income before
extraordinary gain. Depreciation, amortization and deferred interest contributed
an additional $15.1 million of funds, while $8.0 million of funds were used for
working capital purposes. Net cash used for investing activities was $19.0
million and was comprised primarily of $4.3 million of funds used to purchase
assets held for sale and $14.6 million of funds used for capital expenditures.
Net cash used in financing activities was $5.4 million and was comprised
primarily of debt repayments of $2.4 million and capital lease payments of $3.0
million.
In fiscal 1995, net cash used in operating activities was $3.4 million. Of
this amount $9.1 million was due to a net loss, while depreciation and
amortization contributed $17.0 million of funds and $11.3 million of funds were
used for working capital purposes. Net cash used for investing activities was
$7.9 million and was comprised primarily of $4.1 million of funds provided by
the sale of assets held for sale and $11.6 million of funds used for capital
expenditures. Net cash provided by financing activities was $12.7 million and
was comprised primarily of net borrowings of $13.9 million under the Prior
Credit Agreement, capital lease payments of $5.0 million and a capital
contribution of $4.7 million from Holdings. See "Certain Transactions."
In fiscal 1996, net cash used by operating activities was $38.4 million.
Included in the $38.4 million of net cash used by operating activities is $32.6
million of acquisition related, non-recurring charges, a $23.5 million net loss,
an $11.3 million increase in deferred taxes, depreciation and amortization of
$20.6 million and $24.2 million used for working capital. Net cash used for
investing activities was $10.7 million and was comprised of $6.3 million of
funds used for capital expenditures and a net $4.4 million of purchases in
excess of proceeds for assets held for sale. Net cash provided by financing
activities was $49.9 million and was comprised primarily of the issuance of
$125.0 million of the Old Notes, a dividend paid to an affiliate of $238.5
million, a contribution from Holdings of $100.9 million, deferred bond and
finance costs of $18.6 million, issuance of preferred stock of $46.0 million,
net borrowings of $41.9 million, and payments on capital lease obligations and
other expenses of $6.8 million.
Capital expenditures were $14.6 million in fiscal 1994, $11.6 million in
fiscal 1995 and $6.3 million in fiscal 1996. The Company opened, relocated or
expanded 27 stores during fiscal 1994, 63 stores during fiscal 1995 and 64
stores during fiscal 1996. Excluding expenditures for new, expanded and
relocated stores, the Company's capital expenditures during these periods were
primarily for refixturing its stores, automating and fixturing its distribution
centers, opening its Priority Parts depots and upgrading its information
systems. The Company opened, relocated or expanded 64 stores during fiscal 1996
and plans to open, relocate or expand an additional approximately 75 to 100
stores during fiscal 1997. Additional budgeted capital expenditures include
amounts for store remodels and maintenance, as well as for improvements in
distribution and information systems. The Company anticipates that the majority
of its new and relocated stores during fiscal 1997 will be financed by
sale-leaseback or similar arrangements structured as operating leases that
require no net capital expenditures by the Company except for fixtures and store
equipment. For the remainder of its planned new and relocated stores, the
Company expects to spend approximately $120,000 per store for leasehold
improvements.
The sale-leaseback and similar arrangements will allow the Company to open,
relocate and expand more stores than it would otherwise be able to without the
availability of such financing. For the most part, the Company plans to use the
off-balance sheet facility provided by Transatlantic described above. With
respect to this facility, the Funding Companies will acquire and develop the
land and buildings for sites selected by the Company and then lease the
facilities to the Company. The Company may also enter into sale-leaseback
arrangements not provided pursuant to the Transatlantic facility, pursuant to
which it will purchase land, build a store and sell the store to a third-party
lessor. During the period the Company owns the land and builds the store, the
assets will be recorded as assets held for sale. While the Company believes that
the off-balance sheet
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facility provided by Transatlantic described above will provide the capital
necessary to meet its store growth and relocation plan for the foreseeable
future, if necessary, the Company may access the Senior Credit Facility, secure
other alternative means of financing and/or utilize cash flow from operations to
the extent available.
In addition to capital expenditures, the Company's new stores will require
an investment in working capital, principally for inventories, of approximately
$250,000 per new store. A substantial portion of these inventories are expected
to be financed through vendor payables. Pre-opening expenses consisting
primarily of store set-up costs and training of new store associates, average
between $35,000 and $40,000 per store and are expensed during the month in which
a store is opened. See Note 1 to Consolidated Financial Statements.
In February 1995, the Company entered into the Prior Credit Agreement with
a group of lending institutions (the "Previous Lenders"). Under the Prior Credit
Agreement, the Company obtained a term loan in the original principal amount of
$5.0 million and obtained revolving credit loans in an aggregate principal
amount of up to $100.0 million. During fiscal 1995, the Company defaulted in its
compliance with certain then existing financial covenants related to earnings
and balance sheet ratios in the Prior Credit Agreement, which defaults the
Previous Lenders subsequently waived in connection with their agreement to
modify such covenants in a manner which resulted in compliance by the Company
for the periods completed and facilitated continued compliance in subsequent
periods.
On October 30, 1996, the Company repaid all amounts outstanding under the
Prior Credit Agreement, terminated the Prior Credit Agreement and entered into
the Senior Credit Agreement. At February 2, 1997, $138.0 million was drawn under
the Senior Credit Agreement and the Company had $62.0 million of existing
availability thereunder, subject to borrowing base restrictions which would have
permitted $43.1 million of such amount to be borrowed. The outstanding principal
amount under the term loan bears interest at LIBOR plus 3.0%. The amount
outstanding under the revolving credit portion bears interest at LIBOR plus
2.5%. At February 2, 1997, the average interest rate under the Senior Credit
Agreement was approximately 8.5%.
During fiscal 1995 and fiscal 1996, certain affiliates of Carmel made
available to the Company an aggregate of $39.8 million of funding. The funding
consisted of: (i) the purchases from certain Company vendors of payables owed by
the Company, (ii) a capital contribution and (iii) payments to the Company in
the form of sale-leaseback transactions pursuant to which new and relocated
Company stores and store fixtures were purchased by the affiliate at the
Company's cost and are being leased back to the Company. The Company believes
that the terms of such sale-leaseback transactions were at least as favorable as
terms that the Company would have received in similar transactions entered into
with unaffiliated third parties. The Company has replaced certain of these
sale-leasebacks with similar arrangements with unrelated third parties where the
proceeds of the replacement transactions received by the Company's affiliate
were used to enter into additional sale-leaseback transactions with the Company
on substantially similar terms as the original sale-leasebacks. The terms of the
replacement transactions were set in arms-length negotiations, although
generally not as favorable to the Company as the original sale-leasebacks
entered into with affiliates of Carmel. The Company intends to continue to
replace such sale-leasebacks. See "Certain Transactions" and Note 3 to
Consolidated Financial Statements.
QUARTERLY RESULTS AND SEASONALITY
The Company's business is somewhat seasonal in nature, with the highest
sales occurring in the summer months of June through August, in which average
weekly per store sales have historically been approximately 15% higher than in
the slowest months of December through February. The Company's business is, in
addition, affected by weather conditions. While unusually severe weather tends
to soften sales as elective maintenance is deferred during such periods,
extremely hot and cold weather tend to enhance sales by causing parts to fail
and sales of seasonal products to increase.
The following table sets forth certain quarterly unaudited operating data
of the Company for fiscal 1994, 1995 and 1996. The unaudited quarterly
information includes all adjustments which management considers necessary for a
fair presentation of the information shown.
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The data presented below should be read in conjunction with the
Consolidated Financial Statements, including the related Notes thereto included
herein, the other financial information included herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FISCAL 1994
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS)
Net sales..................................... $164,622 $175,498 $180,522 $167,493
Gross profit.................................. 65,044 70,200 73,541 68,992
Operating income.............................. 4,369 5,424 6,621 2,763
Income before extraordinary gain.............. 796 2,024 2,944 2,274
Net income(1)................................. 796 92,641 2,944 8,843
EBITDA........................................ 7,622 8,651 9,793 6,216
FISCAL 1995
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS)
Net sales..................................... $172,301 $186,073 $186,054 $173,924
Gross profit.................................. 68,589 71,416 74,236 70,294
Operating income (loss)....................... 390 578 1,145 (2,275)
Net loss...................................... (1,798) (1,914) (1,645) (3,737)
EBITDA........................................ 3,799 4,367 5,473 2,460
FISCAL 1996
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS)
Net sales..................................... $189,185 $200,895 $202,335 $200,677
Gross profit.................................. 75,476 82,500 84,773 86,969
Operating income (loss)(2).................... 6,026 7,046 8,426 (24,862)
Net income (loss)(3).......................... 1,499 2,113 2,831 (29,977)
EBITDA........................................ 10,910 11,959 13,167 14,508
- ---------------
(1) The Company recorded extraordinary gains of $90.6 million in the second
quarter and $6.6 million in the fourth quarter of fiscal 1994. The
extraordinary gains represent gains resulting from cancellation of a portion
of the Company's long-term debt.
(2) Operating income in the fourth quarter of fiscal 1996 was negatively
affected by non-recurring charges of $20.2 million related to the
Acquisition and Financings (see Note 2 to Consolidated Financial Statements)
as well as by a provision for store closing costs totaling $12.9 million
(see Note 12 to Consolidated Financial Statements).
(3) Net income in the fourth quarter of fiscal 1996 was negatively affected by
non-recurring charges of $32.6 million related to the Acquisition and
Financings (see Note 2 to Consolidated Financial Statements) as well as by a
provision for store closing costs totaling $12.9 million (see Note 12 to
Consolidated Financial Statements).
INFLATION
The Company does not believe its operations have been materially affected
by inflation. The Company believes that it 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.
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BUSINESS
In addition to the historical information contained herein, certain
statements under this caption constitute "forward-looking statements" under the
Reform Act which involve risks and uncertainties. The Company's actual results
may differ significantly from those discussed herein. Factors that might cause
such a difference include, but are not limited to, those discussed under the
captions "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed elsewhere in
this Prospectus.
GENERAL
The Company is the largest retailer of automotive parts and accessories in
the Western United States and one of the largest such retailers in the United
States. As of February 2, 1997, the Company operated 580 stores as a fully
integrated chain under three tradenames, each of which at one time represented a
separate retail chain: Checker Auto Parts, founded in 1968 and operating in the
Southwestern and Rocky Mountain states; Schuck's Auto Supply, founded in 1917
and operating in the Pacific Northwest; and Kragen Auto Parts, founded in 1947
and operating primarily in California. Each chain has a long operating history,
established name recognition and a loyal customer base in its respective
markets. In December 1986, the Checker Auto Parts and Kragen Auto Parts chains
were acquired from Lucky Stores and merged in 1987 with Schuck's to form the
Company. Based on store count, the Company believes it is the largest retailer
of automotive parts and accessories in 18 of its 24 markets.
The Company is a consumer-oriented, specialty retailer primarily servicing
the DIY customer, with an increasing emphasis on the commercial customer. The
Company offers a broad selection of national brand name and private label
automotive products for domestic and imported cars, vans and light trucks,
including new and remanufactured automotive hard parts, maintenance items and
accessories. The Company's operating strategy is to offer these products at
generally the lowest prices in each of its markets and at conveniently located
and attractively designed stores, supported by knowledgeable and courteous
customer service personnel. As a speciality retailer, the Company has chosen not
to sell tires or perform automotive repairs or installations.
Beginning in fiscal 1994, the Company initiated a strategic review of its
operations in order to improve profitability, enhance customer service, improve
the efficiency of its operations and prepare the Company for accelerated growth.
In connection with this program, the Company designed and implemented a
sophisticated, centralized infrastructure, installed various store-level
information systems, initiated its Commercial Sales Program and accelerated its
store expansion and repositioning programs to increase the penetration of its
existing markets. Implementation of these initiatives involved large
expenditures, including approximately $51.3 million of capital and operating
expenditures, and caused certain operating inefficiencies, which adversely
impacted operating results during fiscal 1995. However, the Company believes
these initiatives have provided significant momentum to the Company's operations
and have enabled the Company to significantly improve its operating results
during fiscal 1996. In fiscal 1996, the Company's sales increased to $793.1
million from $718.4 million and its EBITDA increased to $50.5 million from $16.1
million in the comparable period during fiscal 1995.
Several of the Company's key initiatives that have been implemented
beginning in fiscal 1994 are summarized below.
- Commercial Sales Program -- The Company formalized and expanded its
marketing efforts to the commercial segment of the automotive
aftermarket, which the Company believes constitutes in excess of 50% of
the approximately $75 billion of annual sales for this market. The
Company increased the number of stores with Commercial Sales Centers from
an initial roll-out of five at September 30, 1994 to 176 at January 28,
1996 and to 292 at February 2, 1997. Principally as a result of this
expansion, the Company's sales to commercial accounts (including sales by
stores without Commercial Sales Centers) grew to $89.6 million in fiscal
1996 from $60.8 million in fiscal 1995 and $32.6 million in fiscal 1994.
The Company's Commercial Sales Program became profitable in the first
quarter of fiscal
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1996. Based on the success of this Program, the Company is evaluating
opportunities to add Commercial Sales Centers to its existing and new
stores.
- Warehouse and Distribution -- The Company completed the conversion of its
warehouse and distribution facilities from a manual, labor intensive,
paper-based system to a technologically advanced, fully integrated
system, which has significantly reduced warehouse and distribution costs
while providing the Company with sufficient capacity to meet the
requirements of its growth plans for the foreseeable future. This new
system became fully operational during the fourth quarter of fiscal 1995.
In fiscal 1996, the Company's warehouse and distribution expense as a
percentage of sales declined to 3.8% from 4.9% during the comparable
period of fiscal 1995.
- Store-Level Information Systems -- The Company has installed several
store-level systems which have improved store labor productivity and
enabled the Company to provide enhanced customer service. These
initiatives have included installing a new POS system, integrating the
POS with the EPC, implementing its Retail Paperless Management System and
installing a store-wide satellite communications network.
- Customer Service Initiatives -- In order to better develop its employees'
technical expertise and customer service skills, the Company increased
its focus on formal classroom training and on-the-job training, customer
service measurement systems and incentive programs for its district
managers, store managers, sales associates and other employees. The
Company believes these programs have resulted in an increased level of
customer service and store-level efficiency.
- Expanded Product Selection -- The Company expanded its Priority Parts
operation by improving its delivery system and adding eight strategically
located parts depots to its two existing locations. This expansion has
enabled the Company to better serve its customers by making available to
more than 400 of its stores, on a same day delivery basis, an additional
200,000 SKUs not regularly stocked in its stores and has also enabled it
to increase sales to commercial accounts due to the broader availability
of automotive hard parts. Prior to this expansion, this same day delivery
service was available to only 80 of the Company's stores. The Company
believes that its Priority Parts operation provides it with an important
competitive advantage.
- Centralized Call Center -- The Company completed the installation of a
centralized Call Center that handles the overflow of customer calls
during the stores' busiest hours of operation. Use of the Call Center
allows sales associates to give undivided attention to customers at the
store, while customers who call the store are serviced directly by Call
Center operators who are dedicated to such callers. As a result, the Call
Center has enhanced customer service while improving store labor
productivity. At February 2, 1997, over 200 of the Company's stores had
access to the Call Center.
- Store Expansion and Repositioning -- The Company has accelerated the
relocation of smaller stores to larger stores at better locations, the
expansion of certain other stores and the opening of new stores primarily
in existing markets. During fiscal 1996, the Company opened a total of 56
new stores (of which 37 resulted from relocations of existing stores) and
expanded eight stores. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company's strategy is to continue to increase its revenue and cash flow
by capitalizing on the systems and programs which it has implemented and also to
substantially grow its store count. The Company believes that key components of
its expected profitability improvements will be: (i) the continued maturation of
its existing Commercial Sales Centers, combined with expansion of its Commercial
Sales Program to additional stores; (ii) increased operating margins as a result
of efficiencies in its warehouse and distribution system and its significant
investments in store-level systems which improve store labor productivity; and
(iii) accelerating the Company's new store and relocation program.
The focus of the Company's expansion strategy is to open, relocate or
expand stores primarily in existing markets in order to further increase its
name recognition and market penetration while benefiting from economies of scale
in advertising, management and distribution costs. The Company opened, relocated
or
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expanded 64 stores in fiscal 1996 and 63 stores in fiscal 1995 and plans to
open, relocate or expand approximately 75 to 100 stores in fiscal 1997. As of
February 2, 1997, the Company has executed purchase contracts or leases for 51
additional stores and is in various stages of negotiation for 78 more sites. The
Company has also identified numerous potential additional sites for future
expansion. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a discussion of
the anticipated capital expenditures and sources of financing for the Company's
expansion plans.
AUTOMOTIVE AFTERMARKET INDUSTRY
According to industry estimates, the size of the automotive aftermarket for
replacement parts, maintenance items and accessories was approximately $75
billion in sales in 1995. The Company believes that the automotive aftermarket
for parts, maintenance items and accessories is growing because of, among other
things, (i) increases in the size and age of the country's automotive fleet,
(ii) increases in the number of miles driven annually per vehicle, (iii) the
higher cost of new cars as compared to historical costs, (iv) the higher cost of
replacement parts as a result of technological changes in recent models of
vehicles and (v) the increasing labor costs associated with parts, installation
and maintenance.
The automotive aftermarket distribution channels are highly fragmented. The
Company believes, however, that the industry is consolidating as national and
regional specialty retail chains gain market share at the expense of smaller
independent operators and less specialized mass merchandisers. Automotive
specialty retailing chains with multiple locations in given market areas, such
as the Company, enjoy competitive advantages in purchasing, distribution,
advertising and marketing compared to most small independent retailers. In
addition, the increase in the number of automotive replacement parts caused by
the significant increase in recent years in the variety of domestic and imported
vehicle makes and models has made it difficult for smaller independent retailers
and less specialized mass merchandise chains to maintain inventory selection
broad enough to meet customer demands. The Company believes this has created a
competitive advantage for those automotive speciality retailing chains, such as
CSK Auto, Inc. that have the distribution capacity and sophisticated information
systems to stock and deliver a broad inventory selection.
MARKETING AND MERCHANDISING STRATEGY
The Company's marketing and merchandising strategy is to build market share
by providing a broad selection of national brand name and private label products
at generally the lowest prices in each of its markets at conveniently located
and attractively designed stores, supported by knowledgeable and courteous
customer service personnel.
Customer Service
The Company is a customer-oriented retailer dedicated primarily to DIY
consumers. The Company's sophisticated, centralized infrastructure and
store-based information systems, as well as its extensive training programs, are
designed to enhance customer service.
The Company believes that recruiting, training and retaining high quality
sales associates is a major ingredient of successful retailing. The Company has
implemented training programs and incentives to encourage the development of
technical expertise by its sales associates that enables them to effectively
advise customers on product selection and use. CSK University, the Company's
sales associate development program, is dedicated to the continuous improvement
of store associates through structured on-the-job training and formal classroom
education. The curriculum focuses on four areas of the associates' development:
(i) customer service skills, (ii) basic automotive systems, (iii) advanced
automotive systems and (iv) management development. More than 1,200 associates
have passed the ASEP2 (a nationally recognized diploma for parts technicians)
after completing the Company's automotive system training. Much of the training
is delivered through formal classes in 14 training centers that are fully
equipped with the same systems as are in the Company's stores. The Company also
provides continuing training programs for store managers and district managers
designed to assist them in increasing store-level efficiency and improving their
potential for promotion. The Company believes that its training programs enable
sales associates to provide a
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high level of service to a wide variety of customers ranging from less-informed
DIY consumers to more sophisticated purchasers requiring diagnostic advice. In
addition, the Company requires periodic meetings of district and store managers
to facilitate and enhance communications within the organization.
In order to satisfy its customers, the Company has adopted several service
initiatives, including free testing of starters, alternators and batteries; free
charging of batteries; installation assistance for batteries, windshield wipers
and other selected products; "no hassle" return policies; and electronically
maintained lifetime warranties, which eliminate the need for consumer record
keeping. The Company's significant investments in store associate training and
store-level systems have enabled its in-store personnel to devote more time to
attending to their customers' automotive needs.
The Company is enhancing its customer service by implementing a program to
measure and improve the level of customer service at each store. The Company
uses its centralized database as a source to make approximately 64,000 calls
annually to customers inquiring as to their overall satisfaction with the
Company's associates, pricing, product selection and quality. A quantified
customer satisfaction index is provided to each store and the appropriate
management personnel to ensure that customer service levels remain a store
focus.
Product Selection
The Company's objective is to carry a broad selection of national brand
name products that generate customer traffic and have strong appeal to its
commercial customers. In addition, the Company stocks a wide selection of high
quality private label products that appeal to value conscious customers. Private
label products accounted for approximately 25% of total sales in fiscal 1995.
Each store offers an extensive product line, including automotive hard parts
such as starters, alternators, shock absorbers, mufflers, brakes, spark plugs
and batteries, as well as a wide variety of maintenance items, such as motor
oil, lubricants, waxes, cleaners, polishes and antifreeze. In addition, each
store offers general accessories such as car stereos, alarms, trim, floor mats,
tools and seat covers.
The Company's stores, which average approximately 6,260 square feet in
size, offer between 12,000 and 19,000 SKUs of well-known, national brand name
and private label automotive products. In the event that a store does not carry
a specific part, associates are able to access the Company's Priority Parts
operation. Beginning in fiscal 1994, the Company expanded its Priority Parts
operation by improving its delivery system and adding seven strategically
located parts depots to its two existing locations, which has enabled the
Company to (i) better serve its customers by making available to more than 400
of its stores an additional 200,000 SKUs on a same-day delivery basis and
500,000 SKUs on a next-day delivery basis; and (ii) increase sales to commercial
accounts due to broader availability of automotive hard parts. Prior to this
expansion, this same day delivery service was available to only 80 of the
Company's stores. An additional 400,000 SKUs can be ordered for delivery within
three days. The Company's Priority Parts operation handles approximately 150,000
inquiries each week. Store associates are able to electronically inquire on
price and availability and order parts from the Priority Parts operation through
the EPC and receive immediate confirmation of availability without having to
make telephone inquiries. The Company believes that its Priority Parts operation
provides it with an important competitive advantage.
The Company has recently commenced a merchandising program designed to
determine the optimal inventory mix at the individual store level based on that
store's historical sales trends. The Company has classified its product mix into
91 separate categories and believes that it can improve store sales, gross
profit and inventory turnover by tailoring individual store inventory mix based
on historical sales patterns for each of the 91 product categories. This program
has been completed for over 45 hard part categories in fiscal 1996 and the
Company expects to fully implement this program for all remaining categories by
the end of fiscal 1997.
Pricing
The Company's pricing strategy is to generally offer the lowest prices in
each of its markets. The Company offers to beat by 5% any competitor's lower
price. The Company closely monitors its competitors to ensure aggressive pricing
in all markets with merchandise generally priced below manufacturers' suggested
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retail prices. The Company maintains numerous pricing zones in order to maximize
margins while maintaining its price competitiveness.
Advertising
The Company supports its marketing and merchandising strategy through
print, radio and television advertising, as well as through in-store promotional
displays. The Company advertises in print through the use of monthly color
circulars. The circulars, which are produced by the Company's in-house
advertising department, emphasize specific products and contain redeemable
coupons. The Company advertises on radio, television and billboards primarily to
reinforce the Company's image and name recognition. Television advertising is
targeted to sports programming and radio advertising primarily is aired during
drive time. The Company's in-store signs and displays are used to promote
products and identify departments, as well as to announce store specials. The
Company also has web sites on the Internet at: (i) http://www.checkerauto.com,
(ii) http://www.schucks.com and (iii) http://www.kragen.com.
Proprietary Credit Card
The Company has initiated the use of a private label credit card which will
facilitate its customers' purchases of certain more expensive products such as
engines, transmissions and carburetors, provide customer convenience, and
further develop customer loyalty. The credit risk of the new program is being
absorbed by the third-party administrator of the credit card, Household Retail
Services, Inc.
STORE-BASED INFORMATION SYSTEMS
Beginning in fiscal 1994, the Company focused on developing store-based
information systems designed to improve the efficiency of its operations and
enhance customer service. The Company's store-based information systems are
described below.
Point of Sale System
The Company has installed new cash registers and software in all of its
stores, which electronically capture and report customer transactions ("point of
sale" or "POS"). The new POS system, which was rolled-out between June and
October 1995, has improved store productivity and customer service by
streamlining in-store procedures. Customer transactions previously requiring
handwritten information have been eliminated as registers are now tied to the
EPC and the central inventory system. This allows for paperless transactions and
electronic maintenance of warranty information. Additionally, the POS software
tracks the history of individual customer purchases, which allows the Company to
monitor customer activity for use in regionalized marketing and merchandising
programs.
Electronic Parts Catalog
The Company has upgraded and expanded the capabilities of its EPC, which is
installed in each of its stores. The EPC is a software based system that
identifies the location and availability of over one million parts. The EPC is a
user-friendly tool that enables the Company's sales associates to assist
customers in parts selection and ordering based on simple input of the year,
model and engine type and application needed. The EPC system covers vehicles
with model years from 1967 through 1996. Once provided with this basic
information, the EPC displays which part is needed and whether it is located in
the store. If the part is not available at the store, the EPC indicates whether
it can be obtained by special order through the Company's Priority Parts depots
or 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 EPC also displays related parts that the sales
associates can recommend to the customer for purchase, and prints parts lists
for the customer. In fiscal 1995, the Company enhanced the effectiveness of the
EPC by integrating it with its new POS system and centralized Company database.
This integration improves customer service by (i) reducing check-out time by
fully automating the ordering process between the parts counter and the POS
register,
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(ii) allowing the store associate to order parts electronically with immediate
confirmation of availability and/or delivery, and (iii) providing up to the
minute pricing of products.
Retail Paperless Management System
The Company has installed its Retail Paperless Management System ("RPMS"),
which is a store-based software system used to improve store efficiency. The
RPMS provides for interactive store associate development and testing,
communication via Company-wide electronic mail, knowledge-based interviewing of
associate applicants, automated associate time and attendance recording and
forms automation. The Company completed the roll-out of the RPMS in January 1995
and continues to implement new features.
Satellite Communications Network
The Company has established a satellite communications network linking all
of its stores with its corporate office. The satellite network enables the
Company to efficiently obtain and deliver to its stores all file transfers,
including pricing down-loads, sales information updates and interactive
transactions such as electronic parts ordering. The system also broadcasts
common files to all stores simultaneously to update the EPC. Additionally, the
satellite network significantly increases the speed of credit card and check
authorization. The Company completed the roll-out of the satellite network
during the middle of fiscal 1994.
Call Center
The Company has established a centralized Call Center whereby store
personnel have the option to reroute customer calls to a central location during
the store's busiest hours of operation. The Call Center is equipped to enable
Call Center personnel to perform all functions that store personnel would
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 transmit it to the store, enabling the order requested
to be picked-up by the customer. Use of the Call Center allows sales associates
to give their undivided attention to customers at the store while customers who
call the store are serviced directly by Call Center operators who are dedicated
to such callers. The Company currently has more than 200 stores with the
capability of accessing the Call Center.
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STORE OPERATIONS
The Company's stores are divided into five geographic regions: Southwest,
Rocky Mountain, Northwest, Southern California and Northern California. Each
region is administered by a regional manager, each of whom oversees seven to ten
district managers. Each of the Company's district managers has responsibility
for between six and 15 stores. As of February 2, 1997, the geographic
distribution of the Company's stores and the tradenames under which they operate
are set forth in the table below.
SCHUCK'S CHECKER KRAGEN COMPANY
AUTO SUPPLY AUTO PARTS AUTO PARTS TOTAL
----------- ---------- ---------- -------
California................................. -- 1 256 257
Washington................................. 73 -- -- 73
Arizona.................................... -- 69 -- 69
Colorado................................... -- 50 -- 50
Idaho...................................... 13 3 -- 16
Oregon..................................... 23 -- -- 23
Utah....................................... -- 24 -- 24
New Mexico................................. -- 17 -- 17
Texas...................................... -- 19 -- 19
Nevada..................................... -- 13 4 17
Montana.................................... -- 8 -- 8
Iowa....................................... -- 1 -- 1
Nebraska................................... -- 3 -- 3
Wyoming.................................... -- 3 -- 3
--- --- --- -------
109 211 260 580
========= ======== ======== =======
Stores generally are open seven days a week, with hours from 8:00 a.m. to
9:00 p.m. (9:00 a.m. to 6:00 p.m. on Sundays). Each store employs approximately
10 to 20 associates, including a store manager, two assistant store managers and
a staff of full-time and part-time associates.
Store Formats
The Company's stores generally are located in high visibility, high traffic
strip shopping centers or in free standing units adjacent to strip shopping
centers. The stores, which range in size from 2,800 to 15,000 square feet,
average approximately 6,260 square feet in size and offer between 12,000 and
19,000 SKUs.
During fiscal 1995, the Company designed three prototype stores of 6,000,
8,000 and 12,000 square feet in size. The store size for a given new location is
selected based upon volume expectations determined through demographics and
other Company studies included in the Company's detailed site selection process
(see "-- Store Development and Expansion Strategy"). Prior to redesign of the
current prototype stores, the Company utilized various store prototype sizes
including 5,400 and 7,000 square foot prototypes. The following table sets forth
the Company's stores, by size, as of February 2, 1997:
NUMBER OF
STORE SIZE STORES
-------------------------------------------------------------------------- ---------
10,000 sq. ft. or greater................................................. 38
8,000-9,999 sq. ft........................................................ 74
6,000-7,999 sq. ft........................................................ 126
5,000-5,999 sq. ft........................................................ 191
Less than 5,000 sq. ft.................................................... 151
Approximately 60% of the Company's stores are freestanding, with the
balance principally located within strip shopping centers. Approximately 85% to
90% of each store's square footage is selling space, of which approximately 40%
to 50% is dedicated to automotive hard parts inventory. The hard parts inventory
area is fronted by a counter staffed by knowledgeable parts personnel and is
equipped with EPCs. The remaining
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selling space contains gondolas for accessories and maintenance items, including
oil and air filters, additives, waxes and other parts, together with
specifically designed shelving for batteries and, in many stores, oil products.
STORE DEVELOPMENT AND EXPANSION STRATEGY
In the second half of fiscal 1994, the Company accelerated the
repositioning of its store base primarily through (i) the relocation of existing
facilities to larger facilities at better locations, (ii) the expansion of
certain other existing facilities and (iii) the opening of new stores in
existing markets. The Company has identified most of its stores smaller than
5,000 square feet as future relocation or expansion priorities.
The following table sets forth the Company's store development activities
during the periods indicated.
FISCAL YEAR ENDED
-------------------------------------------------------
JAN. 31, JAN. 30, JAN. 29, JAN. 28, FEB. 2,
1993 1994 1995 1996 1997
-------- -------- -------- -------- -------
Beginning stores............................ 549 524 538 544 566
New stores.................................. 1 15 10 24 19
Relocated stores............................ 7 25 12 30 37
Closed stores (including relocated
stores)................................... (33) (26) (16) (32) (42)
--- --- --- --- ---
Ending stores............................. 524 538 544 566 580
--- --- --- --- ---
Expanded stores............................. 2 13 5 9 8
Total new, relocated and expanded stores.... 10 53 27 63 64
--- --- --- --- ---
During fiscal 1996, the Company opened 19 new stores, relocated 37 stores
and expanded eight stores at a total cost of approximately $34.0 million, of
which $30.2 million was funded through sale-leasebacks and $3.8 million was
funded with internally generated funds.
During fiscal 1995, the Company opened 24 new stores, relocated 30 older
stores and expanded nine stores. Store expansion expenditures totaled
approximately $18.9 million, of which $15.5 million was funded through
sale-leasebacks, and $3.4 million was funded with internally generated funds.
During fiscal 1994, the Company established its Market Strategy Group as
part of its Real Estate Department. This Group utilizes a sophisticated,
market-based approach that identifies locations based on detailed demographic
and competitive studies, including population density, growth patterns, age,
ethnicity, 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 existing Company locations to
determine opportunities for relocating or expanding existing stores and opening
new stores.
The Company is seeking to further penetrate its existing markets in the
Western United States by (i) expanding successful stores at existing locations
and, if necessary, by relocating stores in the same market to maximize sales
volume and profitability at proven sites and (ii) adding new stores primarily to
markets currently served by the Company in order to increase market penetration,
while benefiting from economies of scale in advertising, distribution and
management costs.
The Company opened, relocated or expanded 64 stores in fiscal 1996, of
which approximately 70% were relocations or expansions. The Company plans to
open, relocate or expand approximately 75 to 100 stores in fiscal 1997,
primarily in its existing markets. As of February 2, 1997, the Company has
executed purchase contracts or leases for an additional 51 stores and is in
varying stages of negotiations for 78 more sites for relocations or additional
stores and has identified numerous potential additional sites for future
expansion. New stores generally become profitable during the first year of
operation.
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COMMERCIAL SALES PROGRAM
In addition to its primary focus on serving the DIY consumer, in late
fiscal 1994 the Company increased and formalized its marketing efforts to the
commercial segment of the automotive replacement parts market. The Company
believes that this segment of the market constitutes in excess of 50% of the
approximately $75 billion of annual sales in the automotive aftermarket for
replacement parts, maintenance items and accessories. The Commercial Sales
Program, which is intended to facilitate penetration of this market segment, is
targeted to professional mechanics, auto repair shops, auto dealers, fleet
owners, mass and general merchandisers with auto repair facilities and other
commercial repair outlets located near the Company's stores. Each Commercial
Sales Center has a dedicated in-store salesperson, driver and delivery vehicle.
In addition, the Company employs a District Sales Manager who has responsibility
for servicing existing commercial accounts and developing new commercial
accounts for approximately every five stores that have a Commercial Sales
Center.
In fiscal 1993, prior to the formalization and roll-out of the Commercial
Sales Program, sales to commercial customers were $18.6 million. The Company has
experienced strong growth in sales to commercial customers as a result of the
opening and maturation of its Commercial Sales Centers. At September 30, 1994,
the Company commenced operating Commercial Sales Centers in five of its stores
and at February 2, 1997, it operated Commercial Sales Centers in 292 of its
stores. Commercial sales increased to $60.8 million in fiscal 1995 from $32.6
million in fiscal 1994 and to $89.6 million for fiscal 1996. Based on the
initial success of this program, which became profitable in the first quarter of
fiscal 1996, the Company intends to add its Commercial Sales Centers to
approximately 50% of all new stores opened in future years.
PURCHASING
Merchandise is selected and purchased for all stores by personnel at the
Company's corporate headquarters in Phoenix, Arizona from over 300 suppliers. No
one class of product and no single supplier accounted for as much as 10% of the
Company's total sales or purchases in fiscal 1996.
The Company's 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. The Company's store replenishment system generates
orders based upon store on-hand and store model stock. This incudes an automatic
model stock adjustment system utilizing historical sales, seasonality and store
presentation requirements. The Company has also recently implemented an
allocation system that enables it to allocate seasonal and promotional
merchandise based upon a store's history for prior promotional and seasonal
sales.
The Company offers products with nationally recognized, well advertised,
brand names, such as Armor All, Autolite, Blue Streak, Castrol, Dayco, Exide,
Fel-Pro, Fram, Havoline, Mobil, Monroe, Pennzoil, Prestone, Quaker State, Slick
50, Stant, Sylvania, Turtle Wax and Valvoline. In addition to brand name
products, the Company's 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, the Company believes that its private label
products are of a quality that is comparable to such brand name products.
As a result of its improved financial performance and its expected increase
in order amounts as it continues to increase its store count, the Company
anticipates that it will broaden its vendor base and achieve improved pricing
and terms from its existing vendors.
WAREHOUSE AND DISTRIBUTION
The Company has converted its warehouse and distribution system from a
manual, labor intensive, paper-based system to a technologically advanced fully
integrated system, which became fully operational during the fourth quarter of
fiscal 1995. This conversion has significantly reduced warehouse and
distribution costs, while
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providing the Company with sufficient capacity to meet the requirements of its
growth plans for the foreseeable future. The new system utilizes bar coding,
radio frequency scanners and sophisticated conveyor and put-to-light systems. As
part of the overhaul of its warehouse and distribution system, the Company
consolidated from three to two main distribution centers and expanded from two
to four regional distribution centers during fiscal 1995.
In June 1995, the Company completed the construction of its main
distribution center in Phoenix, Arizona, which incorporated the new system and
replaced the Company's existing Phoenix distribution center in October 1995.
During the period from June to October 1995, the Company experienced disruption
in the flow of product from the Phoenix distribution centers to its stores due
to the complications of relocating product to the new distribution center.
Additionally, the Company completed the automation of its Dixon, California main
distribution center in January 1995 and consolidated its Seattle distribution
operations into its Dixon distribution center in April 1995. In connection with
the automation and consolidation of its distribution centers, the Company
experienced disruption in the Dixon distribution center during the majority of
fiscal 1995 as a result of hardware and software problems that were resolved
during the fourth quarter of fiscal 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Both main distribution centers became fully operational during the fourth
quarter of fiscal 1995, and are now operating at significantly improved
productivity levels over those experienced by the pre-existing facilities.
Warehouse and distribution costs, as a percentage of net sales, declined from
4.9% for fiscal 1995 to 3.8% for fiscal 1996. Each store is currently serviced
by one of the Company's two main distribution centers, with the regional
distribution centers handling bulk materials, such as oil, received directly
from vendors. All of the Company's merchandise is shipped by vendors to the
Company's distribution centers, with the exception of batteries, which are
shipped directly to stores by the vendor. The following table sets forth certain
information relating to the Company's two main distribution centers as of
February 2, 1997:
SIZE NUMBER OF NUMBER OF
DISTRIBUTION (SQ. STORES FULL-TIME
CENTER AREA SERVED FT.) SERVED ASSOCIATES
- ------------- ----------------------------------------------- ------- --------- ---------
Phoenix, AZ Arizona, Colorado, Idaho, Nevada, New Mexico,
California, Texas, Utah........................ 273,520 263 235
Dixon, CA California, Nevada, Washington, Oregon, Idaho,
Montana, Wyoming............................... 325,500 317 283
--- ---
599,020 580 518
=== ===
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems constitute an important
element of the Company's operations and growth strategy. The Company uses one
Hitachi Data System EX33 Mainframe, four IBM AS/400's ("AS/400") and over 400
personal computers which are connected to a local area network. A satellite
communications network provides the connectivity from the centralized Company
database to the stores.
The Company's store-based information systems are on a UNIX based platform
with full connectivity between the EPC and the POS systems. This includes
electronic ordering from the EPC via the corporate office AS/400 to the
Company's Priority Parts depots, third-party warehouse distributors and directly
to vendors.
EMPLOYEES
As of February 2, 1997, the Company employed approximately 5,800 full-time
employees and 2,400 part-time employees. Approximately 83% of these personnel
are employed in store level operations, 9% in distribution and 8% in the
Company's corporate headquarters, including its Call Center and Priority Parts
operation.
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The Company has never experienced any material labor disruption and
believes that its labor relations are excellent. Except for 376 employees
located at approximately 36 stores in the San Jose, California market, who have
been represented by a union for more than 18 years, none of the Company's
personnel is represented by a labor union.
FACILITIES
The following table sets forth certain information concerning the Company's
principal facilities:
SQUARE NATURE OF
PRIMARY USE LOCATION FOOTAGE OCCUPANCY
------------------------------------------------- ---------------- ------- ---------
Corporate office................................. Phoenix, AZ 98,000 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
Priority Parts depot............................. Phoenix, AZ 25,643 Leased
Priority Parts depot............................. Denver, CO 26,244 Leased
Priority Parts depot............................. Seattle, WA 12,000 Leased
Priority Parts depot............................. Union City, CA 16,906 Leased
Priority Parts depot............................. San Diego, CA 16,120 Leased
Priority Parts depot............................. El Paso, TX 11,800 Leased
Priority Parts depot............................. Salt Lake, UT 15,123 Leased
Priority Parts depot............................. Rialto, CA 20,252 Leased
Priority Parts depot............................. Sacramento, CA 15,000 Leased (2)
Priority Parts depot............................. Fresno, CA 13,500 Leased
- ---------------
(1) This facility is owned by Missouri Falls Partners, an affiliate of Carmel.
See "Certain Transactions."
(2) This facility is owned by Transatlantic Realty, Inc. ("Realty"), an
affiliate of Carmel. See "Certain Transactions."
At February 2, 1997, all but three of the Company's stores were leased. The
expiration dates (including renewal options) of the store leases are summarized
as follows:
YEARS STORES(1)
---------------------------------------------------------- ---------
1996-2000................................................. 41
2001-2005................................................. 59
2006-2010................................................. 71
2011-2020................................................. 268
2021-2030................................................. 101
2031-thereafter........................................... 37
- ---------------
(1) Of these stores, 12 are owned by Realty. See "Certain Transactions."
COMPETITION
The Company competes principally in the DIY segment of the automotive
aftermarket. Although the number of competitors and the level of competition
vary by market area, the DIY market is highly fragmented and generally very
competitive. The Company competes primarily with national and regional retail
automotive parts chains (such as AutoZone, Inc., Chief Auto Parts, 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.). The Company believes that chains
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of automotive parts stores, such as that operated by the Company, with multiple
locations in regional markets, have competitive advantages in marketing,
inventory selection, purchasing and distribution, as compared to independent
retailers and jobbers that are not part of a chain or associated with other
retailers or jobbers. The Company believes that, as a result of these
advantages, national and regional chains have been gaining market share in
recent years at the expense of independent retailers and jobbers.
The principal competitive factors that affect the Company's business are
store location, customer service, product selection, availability, quality and
price. While the Company believes that it competes effectively in its various
geographic areas, certain competitors are larger in terms of sales volume, have
greater financial and management resources and have been operating longer in
certain geographic areas.
TRADENAMES, SERVICE MARKS AND TRADEMARKS
The Company owns and has registered the service mark "Schuck's" with the
United States Patent and Trademark Office for use in connection with the
automotive parts retailing business. The Company owns the rights to use the
tradenames "Checker" (in connection with the automotive parts retailing business
in the West and Southeast regions of the United States) and "Kragen." In
addition, the Company owns and has registered numerous trademarks with respect
to many of its private label products. The Company believes that its various
tradenames, service marks and trademarks are important to its merchandising
strategy, but that its business is not otherwise dependent on any particular
service mark, tradename or trademark. There are no infringing uses known by the
Company that materially affect the use of such marks.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local laws and
governmental regulations relating to the operation of its business, including
those governing recycling of batteries and used lubricants, and regarding
ownership and operation of real property. The Company handles hazardous
materials during its operations, and its customers may also bring or use
hazardous materials or used oil onto the Company's properties. Additionally,
while the Company does not service automobiles, it does sublease pre-existing
service bays at a small number of store locations to third parties. The
operators of these service bays are required to dispose of certain items,
including used batteries, lubricants and oils in accordance with applicable
environmental regulations. The Company also currently provides a recycling
program for batteries and for the collection of used lubricants at certain of
its stores as a service to its customers pursuant to agreements with third party
vendors. Pursuant to the agreements, the batteries and used lubricants are
collected by Company employees, deposited into vendor-supplied
containers/pallets and then disposed of by the third-party vendors. The
Company's agreements with such vendors are designed to limit its potential
liability under applicable environmental regulations for any harm caused by the
batteries and lubricants to off-site properties or even on-site when such
failure is the fault of the vendor. Many of the agreements provide for
indemnification of the Company against liability that it may incur in connection
with the disposal of such items.
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. The Company does not believe that compliance with such laws and
regulations has had a material impact on its operations to date, but there can
be no assurance that future compliance with such laws and regulations will not
have a material adverse effect on the Company or its operations.
LEGAL PROCEEDINGS
On March 14, 1997, the United States District Court for the District of
Oregon entered an order conditionally dismissing a class action against the
Company pending finalization of a settlement that will be subject to court
approval. The proposed settlement will not be material to the Company's
financial condition, results of operations or cash flow. The class action,
Savage v. Northern Automotive Corporation, Index No. CV94-1418-RE, seeks to
recover allegedly unpaid overtime compensation plus additional liquidated
damages,
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costs and reasonable attorney's fees under the provisions of the Fair Labor
Standards Act. As of April 23, 1997, all but three of the in excess of two
hundred plaintiffs who had opted into the class had indicated that they would
accept the Company's settlement offer. In the event that the Company, the class
of plaintiffs or the District Court disapprove of the settlement, the action
could be resumed. The Company believes that the District Court will approve the
settlement, leaving the action terminated with respect to the settling parties.
Although any plaintiffs who object to the approved settlement will have the
option of pursuing their individual claims, the Company believes that in the
aggregate the pending settlement and any recovery by such objecting plaintiffs
will not be material to the Company.
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. The damages claimed against the
Company in some of these litigations are substantial. Although the amount of
liability that may result from these matters cannot be ascertained, the Company
does not currently believe that, in the aggregate they will result in
liabilities material to the Company's consolidated financial condition, results
of operations or cash flow.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as set forth in the
table below:
NAME AGE POSITION AT THE COMPANY
- --------------------------- --- --------------------------------------------------
Maynard Jenkins(1)......... 54 Chairman of the Board and Chief Executive
Officer(2)
James Bazlen............... 47 President, Chief Operating Officer, Chief
Financial Officer and Director
Martin Fraser.............. 42 Senior Vice President -- Distribution and
Replenishment
Robert Shortt.............. 36 Senior Vice President -- Marketing and
Merchandising
Henry Torres............... 33 Senior Vice President -- Information Systems and
Re-Engineering
Dale Ward.................. 47 Senior Vice President -- Store Operations
Don Watson................. 41 Senior Vice President -- Finance and Treasurer
Lon Novatt................. 36 Vice President -- Legal, General Counsel and
Secretary
Jon P. Hedley.............. 36 Director
Edward G. Lord, III........ 48 Director
Christopher J. O'Brien..... 38 Director
Charles J. 46 Director
Philippin(1)(3)..........
Robert Smith(3)............ 58 Director
Christopher J. Stadler(1).. 33 Director
Jules Trump(1)............. 53 Director(4)
Eddie Trump(1)............. 51 Director
Savio W. Tung.............. 45 Director
- ---------------
(1) Member of the Compensation Committee.
(2) Mr. Jenkins assumed these positions on January 27, 1997.
(3) Member of the Audit Committee.
(4) Until January 27, 1997, Mr. Trump also served as the Company's Chairman of
the Board and Chief Executive Officer.
Election of directors is subject to the provisions of a stockholders'
agreement (see "Certain Transactions -- Stockholders' Agreement").
All directors are elected annually and serve until the next annual meeting
of stockholders or until the election and qualification of their successors.
Executive officers are elected annually by the Board of Directors and hold
office at the discretion of the Board. There are no family relationships among
the directors or executive officers of the Company, except that Jules Trump and
Eddie Trump are brothers. During fiscal 1996, the Board of Directors held one
formal board meeting and acted by unanimous written consent on 10 occasions.
Maynard Jenkins has been the Chairman of the Board and Chief Executive
Officer of the Company since January 1997. Prior to joining the Company, Mr.
Jenkins served as President and Chief Executive Officer of Orchard Supply
Hardware from December 1986 to January 1997. Prior thereto Mr. Jenkins held
various executive positions with Gemco.
James Bazlen has been a director of the Company since July 1994. He
previously served as a director of the Company from November 1989 through June
1992. Prior to his June 1994 promotion to President and Chief Operating Officer,
Mr. Bazlen was Vice Chairman and Chief Financial Officer of the Company from
June 1991 and also served as Senior Vice President of The Trump Group from March
1986. Mr. Bazlen had been the Senior Vice President of the Company from April
1990 to June 1991. Prior to joining The Trump Group in 1986, Mr. Bazlen served
in various executive positions with General Electric Company for 13 years.
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Martin Fraser has been Senior Vice President -- Distribution and
Replenishment since April 1997. Prior to that, Mr. Fraser was Vice President of
Distribution and Replenishment of the Company since August 1995. From September
1989 to August 1995, he served in several executive positions with the Company,
including Vice President of Logistics and Vice President -- Inventory
Management.
Robert Shortt has been Senior Vice President -- Merchandise and Marketing
since April 1997. Prior to that, Mr. Shortt was Vice President -- Merchandising
and Marketing of the Company since April 1996. From April 1995 to April 1996,
Mr. Shortt was Vice President of Marketing for the Price Pfister division of
Black & Decker Corp. From March 1993 to April 1995, Mr. Shortt was Vice
President of Marketing of the Kwikset division of Black & Decker Corp. Prior
thereto, from March 1991 to March 1993, he was Director of Marketing of Kwikset
division of Black & Decker Corp.
Henry Torres has been Senior Vice President -- Information Systems and
Re-Engineering since April 1997. Prior to that Mr. Torres was Vice
President -- Information Systems and Re-Engineering of the Company since
February 1996. From September 1995 to February 1996, Mr. Torres was Vice
President of Re-Engineering. From December 1993 to September 1995, Mr. Torres
was Director of Re-Engineering of the Company. Prior thereto, from April 1989 to
December 1993, Mr. Torres held various executive positions for Sam's
Club/Wal-Mart Stores, Inc., a discount retailer.
Dale Ward has been Senior Vice President of Operations since March 1997.
Prior to that Mr. Ward served as Executive Vice President and Chief Operating
Officer of Orchard Supply Hardware since April 1996. Mr. Ward served as
President and Chief Executive Officer of F&M Super Drug Stores, Inc., a drug
store chain, from 1994 to 1995. He also served as President and Chief Executive
Officer of Ben Franklin Stores Inc., a variety and craft store chain, from 1988
to 1993 and as Chairman of Ben Franklin Crafts Inc., a craft store chain, from
1991 to 1993.
Don Watson has been Senior Vice President -- Finance and Treasurer since
April 1997. Prior to that Mr. Watson had been the Company's Vice
President -- Finance, Controller and Treasurer since April 1993. From June 1988
to March 1993, he was Vice President and Controller of the Company.
Lon Novatt has been Vice President -- Legal, General Counsel and Secretary
of the Company since December 1995. From March 1994 to November 1995, Mr. Novatt
was Senior Counsel for Broadway Stores Inc., a department store chain. From
October 1985 to February 1994, Mr. Novatt was with the Los Angeles law firm of
Freeman, Freeman & Smiley, where he was a partner from January 1992 to February
1994.
Jon P. Hedley became a director of the Company on October 30, 1996. He has
been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since April 1990. Mr. Hedley is a director of Saks
Holdings, Inc., Simmons Company and Prime Service, Inc.
Edward G. Lord, III became a director of the Company in April 1997. He has
been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since November 1994. Prior to joining Investcorp, Mr.
Lord was a Managing Director of Dean Witter Realty. From 1991 until he joined
Dean Witter, Mr. Lord was a senior officer of the Mutual Life Insurance Company
of New York.
Christopher J. O'Brien became a director of the Company on October 30,
1996. He has been an executive of Investcorp, its predecessor or one or more of
its wholly-owned subsidiaries since December 1993. Prior to joining Investcorp,
Mr. O'Brien was a Managing Director of Mancuso & Company for four years. Mr.
O'Brien is a director of Simmons Company, Star Markets, Inc., Prime Service,
Inc. and The William Carter Company.
Charles J. Philippin became a director of the Company on October 30, 1996.
He has been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since July 1994. Prior to joining Investcorp, Mr.
Philippin was a partner of Coopers & Lybrand L.L.P. Mr. Philippin is a director
of Saks Holdings, Inc., Simmons Company, Prime Service, Inc. and The William
Carter Company.
Robert Smith became a director of the Company on October 30, 1996. Mr.
Smith is a Protector of Carmel (see "Principal Stockholders"). Mr. Smith has
served as President of Newmark Capital Limited, a private investment and
consulting company since March 1992. Prior thereto, from August 1989, he served
as
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Chief Executive Officer of First Hungarian Investment Advisory Rt., an
investment management company. Mr. Smith also serves as Chairman of Becet
International, a Kazakhstan cellular telephone company, and is a director of
Rogers Cantel Mobile Communications Inc. and Petersburg Long Distance Inc.
Christopher J. Stadler became a director of the Company on October 30,
1996. He has been an executive of Investcorp, its predecessor or one or more of
its wholly-owned subsidiaries since April 1, 1996. Prior to joining Investcorp,
Mr. Stadler was a Director with CS First Boston Corporation. Mr. Stadler is a
director of Prime Service, Inc. and The William Carter Company.
Jules Trump was the Chairman of the Board of the Company from December 1986
until January 27, 1997, its Chief Executive Officer from March 1990 until
January 27, 1997, and a director of the Company since December 1986. Mr. Trump
has also served as Chairman or Co-Chairman of The Trump Group, a private
investment group, since February 1982.
Eddie Trump has been a director of the Company since July 1994. Mr. Trump
previously served as a director of the Company from December 1986 until July
1992. Since February 1982, Mr. Trump has served as President or Co-Chairman of
The Trump Group.
Savio W. Tung became a director of the Company on October 30, 1996. He has
been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since September 1984. Mr. Tung is a director of Saks
Holdings, Inc., Star Markets, Inc. and Simmons Company.
COMMITTEES OF THE BOARD OF DIRECTORS
In April 1997, the Board of Directors of the Company created a Compensation
Committee and an Audit Committee. Messrs. Jenkins, Philippin, Stadler, Jules
Trump and Eddie Trump were appointed to the Compensation Committee and Messrs.
Philippin and Smith were appointed to the Audit Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee during fiscal 1996. Jules
Trump and Eddie Trump each participated in deliberations concerning executive
officer compensation. No executive officer of the Company serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of Directors.
COMPENSATION OF DIRECTORS
Directors of the Company who are also employees of the Company do not
receive any additional compensation for serving as directors of the Company.
Directors of the Company who are not employees of the Company do not receive any
compensation for serving as directors.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued by the Company for services rendered during fiscal 1996 (which is a
53 week year) to the Company's Chief Executive Officer and the Company's four
other most highly compensated executive officers ("Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY COMPENSATION
- -------------------------------------------------------------------- -------- ------------
Maynard Jenkins..................................................... $ 10,100 $ 72(1)
Chairman of the Board and Chief Executive Officer, from January
27, 1997
Jules Trump......................................................... 392,700 35,672(2)
Chairman of the Board and Chief Executive Officer, until January
27, 1997
James Bazlen........................................................ 376,000 6,460,594(3)
President, Chief Operating Officer and Chief Financial Officer
Arthur Hicks........................................................ 228,500 1,627,665(4)
Former Executive Vice President-Store Operations
William Stapleton................................................... 190,400 1,080,599(5)
Former Senior Vice President-Information Systems
Martin Fraser....................................................... 148,500 349,587(6)
Senior Vice President-Distribution and Replenishment
- ---------------
(1) Represents insurance premiums paid by the Company with respect to term life
insurance covering Mr. Jenkins.
(2) Represents reimbursement of medical expenses in excess of insurance coverage
provided by the Company and insurance premiums paid by the Company with
respect to term life insurance covering Mr. Trump.
(3) Represents insurance premiums paid by the Company with respect to term life
insurance covering Mr. Bazlen, contributions made by the Company to its
Retirement Program based upon Mr. Bazlen's contributions and payments
pursuant to an equity participation agreement.
(4) Represents insurance premiums paid by the Company with respect to term life
insurance covering Mr. Hicks, contributions made by the Company to its
Retirement Program based upon Mr. Hicks' contributions and payments pursuant
to an equity participation agreement.
(5) Represents insurance premiums paid by the Company with respect to term life
insurance covering Mr. Stapleton, contributions made by the Company to its
Retirement Program based upon Mr. Stapleton's contributions and payments
pursuant to an equity participation agreement.
(6) Represents reimbursement of medical expenses in excess of insurance coverage
provided by the Company, insurance premiums with respect to term life
insurance covering Mr. Fraser, contributions made by the Company to its
Retirement Program based upon Mr. Fraser's contributions and payments
pursuant to an equity participation agreement.
EXECUTIVE EMPLOYMENT ARRANGEMENTS
The Company has entered into employment arrangements which it is in the
process of finalizing into written agreements with Messrs. Jenkins and Bazlen
pursuant to which they are earning annual base salaries of $525,000 and
$400,000, respectively. Pursuant to these arrangements, Messrs. Jenkins and
Bazlen will be eligible for bonuses based upon EBITDA targets to be specified in
their final agreements or, in the case of Mr. Jenkins for fiscal 1997, the
discretion of the Board of Directors. It is anticipated that these agreements
will not contain stated termination dates, but rather will be terminable at will
by either party. If the Company were to terminate the employment of Mr. Bazlen
without cause or if he terminates his employment for Good Reason (which will be
defined therein), the Company has agreed to continue to pay him at a rate equal
to his annual base salary then in effect for a period of one year from his
termination. It is anticipated that Mr. Jenkins' employment agreement will
provide that if he is terminated without cause or if he terminates his
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employment for Good Reason (which will be defined therein), he will continue to
receive his base salary and performance bonus for a period of 24 months. In
connection with Mr. Jenkins becoming the Company's Chief Executive Officer and
relocating to, and purchasing a home in, the Phoenix area, Mr. Jenkins received
a loan of $550,000 from the Company. See "Certain Transactions."
RETIREMENT PROGRAM
The Company sponsors the CSK Auto, Inc. Retirement Program (the "Retirement
Program"), a defined contribution plan that is qualified under Section 401(k) of
the Internal Revenue Code of 1986, as amended (the "Code"). Participation in the
Retirement Program is voluntary and available to any employee, after one year of
employment, who is 21 years of age. Each participant can elect to contribute up
to 15% of his compensation on a pre-tax basis, subject to the legal maximum of
$9,500 per individual. In accordance with the provisions of the Retirement
Program, the Company may elect to make matching contributions to the Retirement
Program. For calendar year 1996, the Company matched 20% of the first 6% of
compensation contributed by each participant for the year. Contributions to the
Retirement Program and Retirement Program earnings are fully vested. The Company
made matching contributions of approximately $288,000 to the Retirement Program
in fiscal 1996.
INCENTIVE COMPENSATION PLAN
In May 1996, the Company instituted a general and administrative staff
incentive compensation bonus plan (the "Incentive Plan"). The Incentive Plan is
administered by the Chief Executive Officer of the Company. It was in effect
during the Company's 1996 fiscal year. The Incentive Plan is designed to reward
eligible Company executives, managers and supervisors for the achievement of
pre-defined Company performance objectives. Generally, employees at the
supervisor level or above are eligible to participate in the Incentive Plan. At
the beginning of the plan period, a financial goal for the Company is
established by the Chief Executive Officer, who is ineligible for the Incentive
Plan. The financial goal is based upon a measure of earnings before taking into
account interest, taxes, depreciation and amortization. Depending on the
percentage of the financial goal which is met, a percentage of each eligible
employee's base salary will be paid as a bonus. Bonus awards are determined by
multiplying an eligible employee's base salary by a pre-determined,
corresponding percentage which is based on the amount of the financial goal
achieved by the Company. Bonus payments are made semi-annually and are pro-rated
if an employee has not been employed continuously by the Company during the
fiscal year. In fiscal 1996, the Company incurred approximately $1.0 million of
expense with respect to the Incentive Plan.
EQUITY PARTICIPATION AGREEMENTS
Prior to the Acquisition, the Company had entered into incentive
compensation agreements with certain of its executives pursuant to which they
would be compensated in a sale of the Company's equity securities as if they
owned specified percentages of the Company's then outstanding common stock.
Pursuant to the agreements, Messrs. Bazlen, Hicks, Fraser and Stapleton, as well
as three other current executive officers who are not Named Executive Officers,
became entitled to certain payments in connection with the Acquisition based
upon the consideration they would have been entitled to if they had owned an
aggregate of 6.4% of the Company's common stock and had sold all of such common
stock in connection with the Acquisition at the price per share paid for such
shares in the Acquisition. In satisfaction of all Company obligations under the
agreements, upon closing of the Acquisition and Financings, such individuals
received payments in the aggregate amount of $9.9 million, of which Mr. Bazlen
received $6.5 million, Mr. Hicks received $1.6 million, Mr. Fraser received $0.3
million and Mr. Stapleton received $1.1 million. A second payment of equal
amount will become due one year from the closing of the Acquisition to each such
individual unless such individual terminates his employment with the Company
during such period, and Carmel will reimburse the Company for 60% (the estimated
after-tax cost to the Company) of the amount of such latter payments made one
year from the closing of the Acquisition and Financings. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Effect of the Acquisition and Financings."
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1996 ASSOCIATE AND EXECUTIVE STOCK OPTION PLANS
On October 30, 1996, subject to their approval by the Company's Board of
Directors, the Company awarded options to purchase shares of Class B Stock of
Holdings under its Associate Stock Option Plan (the "Associate Plan") and its
Executive Stock Option Plan (the "Executive Plan" and together with the
Associate Plan, the "Plans") in order to provide incentives to store managers
and salaried corporate and warehouse employees of the Company. In February 1997,
the Company's Board of Directors approved the Plans and the issuance of the
above-described options.
The Plans may be administered by a committee of the Board of Directors of
Holdings, which would have broad authority in administering and interpreting the
Plans, or, if a committee has not been appointed, by the entire Board of
Directors. The Plans provide that, at such time as Holdings has a class of
equity securities registered under Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the committee must consist entirely of
"Non-Employee Directors" (as defined in Rule 16b-3 under the Exchange Act). A
committee has not yet been appointed to administer the Plans.
Options to purchase up to an aggregate of 37,000 and 21,000 shares of Class
B Stock may be granted under the Associate Plan and the Executive Plan,
respectively. Options granted under the Plans may be options intended to qualify
as incentive stock options under Section 422 of the Internal Revenue Code of
1986, as amended, or options not intended to so qualify. In the event that an
optionee's employment with the Company is terminated, depending on the timing
and reasons for such termination, the Option may terminate, remain exercisable
for a short period or be replaced by a right to receive certain payments upon
completion of an initial public offering of Holdings' securities. In the event
of a sale of more than 80% of the outstanding shares of capital stock of
Holdings or 80% of its assets, the vested portion of an option and, under
circumstances, the unvested portion, will be purchased by Holdings.
Holdings has granted options to purchase 34,705 shares under the Associate
Plan and 14,356 shares under the Executive Plan. The exercise price applicable
to these options is $205.88 per share, the fair market value at the date of
grant based upon the price paid for such shares in the Acquisition. All options
expire on the seventh anniversary of the date of grant (or, under certain
circumstances, 30 days later).
Each option granted under the Plans will be subject to vesting provisions
and, whether or not then vested, will not become exercisable until the earlier
of the occurrence of an initial public offering of Holdings' securities and the
seventh anniversary of the date of grant. Options granted under the Associate
Plan will vest in three equal installments on the second, third and fourth
anniversaries of the date of their grant, assuming the associate's employment
continues during this period ("Four Year Vesting"). Options granted under the
Executive Plan will be subject to the Four Year Vesting as to 84% of such
options and performance vesting (over the same four years) as to the remaining
16%. The performance vesting criteria will be based upon achieving specified
operating results. Partial vesting of options subject to performance vesting
will occur if the Company achieves less than 95% of the specified operating
results. Any portion of options granted under the Executive Plan which are
subject to performance vesting and which do not vest during the four years will
automatically vest 90 days prior to the end of the option's term. If the
specified operating results are exceeded for any year by at least 10%, the
executive will receive options for up to an additional 5% (20% on a cumulative
basis) of his or her original option grant.
Currently, Vice Presidents and Senior Vice Presidents are eligible for
participation in the Executive Plan. Holdings intends to provide a separate
option program for the Company's Chief Executive Officer and Chief Operating
Officer, who are not covered by either of the option plans described above. The
terms and amounts of these options have not yet been finalized.
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CERTAIN TRANSACTIONS
In October 1989, the Company entered into a nine year lease (the "Initial
Lease") for its corporate headquarters in Phoenix, Arizona, with an unaffiliated
landlord. The lease relates to approximately 78,577 square feet and provides for
a current base rent of approximately $1.4 million per year. During January 1994,
Missouri Falls Holdings Corp., an affiliate of the Company, acquired an interest
in the partnership ("Missouri Falls Partners") which acquired the building and
assumed the lease between the Company and the former landlord. In April 1995,
the Company assumed a lease (the "Subsequent Lease") between a former tenant and
Missouri Falls Partners for approximately 11,680 square feet of additional
office space at a current lease rent of $148,958 per year. Such lease expires in
April 1998. In connection with the Acquisition, both the Initial Lease and the
Subsequent Lease were extended through October 2006 and, at its originally
scheduled termination in April 1998, rent under the Subsequent Lease was
increased to the same per square foot rent as is charged under the Initial
Lease. Additionally, the Company rents approximately 5,190 square feet of
additional space at these premises on a month-to-month basis for an annual
rental of $64,875.
An obligation of the Company incurred in connection with the purchase of
product from two of its vendors was subsequently transferred to Transatlantic,
an affiliate of Carmel. At the time of such transfers, the Company owed the sum
of approximately $16.5 million (less anticipated discounts of approximately $0.8
million) to the vendors. As of September 29, 1996, the obligation had been paid
in full.
The sum of approximately $15.5 million was paid to Transatlantic as of
December 27, 1996 pursuant to the Company's promissory note dated July 24, 1996.
The promissory note was issued to evidence a loan to the Company, in the amount
of $15.0 million, the proceeds of which were used for the payment of vendors.
The Company has agreed to pay to Transatlantic, in March of 1998, the sum
of $1.0 million on account of fees for past financings.
Transatlantic Realty, Inc. ("Realty"), another affiliate of Carmel, has
entered into a series of sale-leaseback transactions with the Company with
respect to various real property and fixtures since October 1995. The total
funding provided by Realty in these transactions through February 26, 1997 was
approximately $33.1 million, which represented the cost of such assets to the
Company. The real property leases (approximately $13.4 million) provide for a
term of 20 years (with renewal options for an additional 20 years). The annual
rent during the initial term of each lease is 10% of the sale proceeds paid by
Realty and during any option period is to be fair market rent. The fixture
leases (approximately $1.9 million) provide for a term of five years at a 10%
rate with an estimated residual of 10% at the end of the lease. The Company has
replaced approximately $13.9 million of the real property sale-leasebacks and
$3.9 million of the fixture sale-leasebacks with similar arrangements with
unrelated third parties where the proceeds of the replacement transactions
received by Realty were used to enter into additional sale-leaseback
transactions with the Company on substantially similar terms as the original
sale-leasebacks. The terms of the replacement transactions were set in
arm's-length negotiations although generally not as favorable to the Company as
the original sale-leasebacks entered into with Realty. The Company intends to
continue to replace such sale-leasebacks and has agreed to use its best efforts
to do so (including, in certain cases, increasing rent payable under such
leases). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 3 to
Consolidated Financial Statements.
Pursuant to an Agreement (the "Real Estate Agreement") entered into at the
closing of the Acquisition and Financings, Funding Companies will acquire and
develop properties and lease them to the Company. At the closing of each land
purchase, a Funding Company, as landlord, and the Company, as tenant, will enter
into a triple net lease with respect to such land, and the buildings and
improvements erected or to be erected thereon. The obligation of the Funding
Companies to acquire and develop additional properties will cease when the cost
of all such acquisitions (including construction costs) would exceed $50.0
million, provided that as leased properties are disposed of by the Funding
Companies, funds available to purchase additional properties will be
replenished. The term of the commitment for the investment in such land
purchases and leases commenced on October 30, 1996 and will end on the earliest
of (i) April 30, 2004, and (ii) a termination of the Real Estate Agreement by
Carmel or the Company, at their respective options, upon the occurrence of
certain events specified in the Agreement. The terms of the Real Estate
Agreement were set in
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arm's-length negotiations and the Company believes such terms to be at least as
favorable to it as could be obtained from unaffiliated third parties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." As of February 2, 1997, the
Company had eight properties and associated fixtures in various stages of
completion which reduced the availability under this facility by approximately
$3.4 million.
During November 1993, a former affiliate of the Company was sold by
Holdings to an independent third party. Prior to such sale during fiscal 1993,
the Company received approximately $1.3 million for management services provided
to such affiliate. At the time of the sale, the Company was owed $11.4 million
for management and support services provided to the former affiliate. In
connection with the November 1993 sale, Holdings assumed the $11.4 million
obligation owed to the Company of which it subsequently paid approximately $8.4
million. The Company has since cancelled the balance of $3.0 million. See Note 3
to Consolidated Financial Statements.
The taxable income and losses of the Company and its subsidiaries (the
"Company Group") will be included in the consolidated federal income tax returns
filed by Holdings. The Company and/or certain subsidiaries may also be included
in certain state income tax returns filed by Holdings (or its affiliates). Each
member of the Company Group and Holdings (collectively, the "Consolidated
Group") has entered into a Tax Sharing Agreement (the "Tax Sharing Agreement")
pursuant to which (i) the Company's federal tax liability, if any, computed on a
separate return basis will not exceed the aggregate tax liability of the
Consolidated Group, (ii) the tax liability, if any, of other members of the
Consolidated Group may be reduced by the utilization of a portion of the
Company's tax loss carryforwards, and (iii) for any year in which federal income
taxes are payable on a consolidated basis, each of the members of the
Consolidated Group who, on a stand alone basis, would have had a federal tax
obligation for such year will be obligated to pay a pro-rata portion of the
consolidated tax obligation.
In connection with the Acquisition and Financings, $40.0 million of
Holdings Notes were acquired by a designee of the Initial Investcorp Group,
Southwest Finance Limited ("Southwest Finance"), a company in which an affiliate
of Investcorp holds a minority interest. In connection with the purchase of the
Holdings Notes, Southwest Finance received a fee of $4.0 million. In addition,
in connection with the Acquisition, Invifin S.A., an affiliate of Investcorp
("Invifin"), received a fee of $1.575 million for providing a standby commitment
to fund the amount of the Senior Credit Facility and the Company paid Investcorp
International Inc. ("International") advisory fees of $1.275 million. The
Company also paid $3.15 million to International for arranging the Senior Credit
Facility.
In addition, in connection with the Acquisition, the Company entered into a
five year agreement for management advisory and consulting services (the
"Management Agreement") with International pursuant to which the Company paid
International at the closing of the Acquisition $5.0 million for the entire term
of the Management Agreement in accordance with its terms.
In connection with his recent hiring as Chief Executive Officer, Mr.
Jenkins executed a note in favor of the Company in the principal amount of
$550,000. The note matures in 1999 and bears interest at a rate of 4.535%. The
proceeds of the loan were used by Mr. Jenkins to finance the purchase of the new
home required as a result of his relocation. This loan was authorized by the
board of directors prior to the commencement of Mr. Jenkins' employment.
STOCKHOLDERS' AGREEMENT
Upon the closing of the Acquisition and Financings (the "Closing"), each of
the stockholders of Holdings (the "Stockholders"), Holdings and the Company
entered into a stockholders' agreement (the "Stockholders' Agreement") which
imposes certain restrictions on, and rights with respect to, the transfer of
shares of capital stock of Holdings held by the Stockholders ("Shares") and
entitles the Stockholders to certain rights regarding corporate governance.
Other than permitted transfers to affiliates and certain family members
("Permitted Transferees"), any proposed sales or other transfers of Shares by
any Stockholder will be subject to the first right of the Company and each of
the other Stockholders to purchase such offered Shares on the same terms and
conditions of the
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proposed third-party sale. In addition, at any time following the second
anniversary of the date of the Closing, any Stockholder wishing to sell any of
its Shares, whether or not it has received a third-party offer, may offer to
sell such Shares to Holdings and the other Stockholders on terms and conditions
established by the selling Stockholder. In the event that Holdings and/or the
other Stockholders fail to exercise their right to purchase, the selling
Stockholder may sell such offered Shares to third parties on such terms and
conditions specified in the Stockholders' Agreement.
Under certain circumstances, if, following the first anniversary of the
Closing, members of the Original Investcorp Group or the Original Carmel Group
(each as defined below) desire to sell all of their Shares in an unaffiliated
third-party sale pursuant to an offer by such third party to acquire all of the
outstanding Shares of Holdings, then the selling Stockholders will have the
right to require each of the other Stockholders to sell all of their Shares in
the same transaction and upon the same terms and conditions as received by the
selling Stockholders; provided that the other Stockholders will have the right
to purchase, and/or have Holdings purchase, from the selling Stockholders all of
the Shares held by the selling Stockholders upon the terms and conditions such
Shares were proposed to be sold by the selling Stockholders. For purposes of
this section, the "Original Investcorp Group" shall mean the members of the
Initial Investcorp Group and each of their Permitted Transferees; the "Original
Carmel Group" shall mean Carmel and each of its Permitted Transferees; the
"Investcorp Group" shall mean the members of the Initial Investcorp Group and
each of their respective transferees and subsequent transferees; and the "Carmel
Group" shall mean Carmel and each of its transferees and subsequent transferees.
Notwithstanding the foregoing, during the first year following the Closing,
Carmel has the right to require the Investcorp Group to sell all of the Shares
held by it for $210 million in a transaction pursuant to which all of the Shares
held by all of the Stockholders will be purchased by a third party and all
Holdings Notes will be redeemed.
The Stockholders' Agreement also provides that, in the event any
Stockholder (the "Proposed Transferor") proposes to transfer any Shares (other
than to permitted transferees, pursuant to a registered public offering or under
Rule 144) to any person (the "Proposed Purchaser"), each of the other
Stockholders will have the right to require the Proposed Purchaser to purchase a
corresponding percentage of its Shares with a corresponding reduction in the
number of Shares to be purchased from the Proposed Transferor. Each Stockholder
will also have preemptive rights under certain circumstances to acquire a
portion of any additional Shares offered at any time by Holdings, other than in
connection with a public offering and certain non-cash issuances, in order to
enable such Stockholder to maintain its percentage equity ownership in Holdings.
The Stockholders' Agreement also provides the Stockholders with various
registration rights commencing upon the earlier of an initial public offering of
the Company's securities or the fifth anniversary of the Closing.
Under certain circumstances, members of the Investcorp Group or the Carmel
Group will have the right to offer all of their Shares for sale to the other
Stockholders who are members of the other group (the "Offeree Stockholders") at
a price established by the offering Stockholders. If Holdings and/or the Offeree
Stockholders do not purchase the offered Shares, the offering Stockholders must
then purchase all of the Shares held by the members of the other group at the
price first offered by the offering Stockholders.
The Stockholders' Agreement provides that the Investcorp Group will have
the right to nominate a majority of the members of the Boards of Directors of
Holdings, the Company and their respective subsidiaries so long as it holds a
greater number of Shares than the Carmel Group, and the Carmel Group will have
the right to nominate a majority of the members of such Boards of Directors
during any period in which the Carmel Group holds a greater number of Shares.
Pursuant to the Stockholders' Agreement, each of the Stockholders agrees to vote
all of its shares in favor of each of the persons nominated to such Boards by
each group.
In addition, at least one member of the Boards of Directors nominated by
each group must approve certain fundamental corporate actions proposed to be
taken by Holdings or the Company, including, without limitation, (i) the making
of any assignment for the benefit of its creditors or the commencement of any
bankruptcy or similar proceedings, (ii) the addition of certain new unrelated
lines of business, (iii) certain sales of its assets, (iv) certain significant
mergers, consolidations and acquisitions, (v) the incurrence of certain
significant indebtedness, (vi) certain transactions with affiliates, (vii) any
amendment to its certificate
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of incorporation or by-laws, (viii) the execution, amendment, modification or
termination of certain significant agreements, (ix) the termination or
significant change in duties of certain officers of Holdings, and (x) certain
issuances of Shares by Holdings.
The Stockholders' Agreement will terminate, other than with respect to the
registration rights provided for therein, at such time as either the Investcorp
Group or the Carmel Group holds Shares representing less than the lesser of (i)
5% of the then current voting power or (ii) 10% of the number of Shares having
voting power held by such group at the time of the Closing. Notwithstanding the
foregoing, the provisions of the Stockholders' Agreement requiring the consent
of at least one director nominated by each group shall terminate at such earlier
time as either (a) the Investcorp Group and the Carmel Group fail to hold in the
aggregate Shares representing more than 50% of the then current voting power or
(b) either the Original Investcorp Group or the Original Carmel Group holds less
than 50% of the number of Shares having voting power held by such group at the
time of the Closing.
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PRINCIPAL STOCKHOLDERS
All of the Company's issued and outstanding capital stock is owned by
Holdings. The Class D Stock, par value $.01 per share and the Class E Stock, par
value $.01 per share, are the only classes of Holdings' stock that have the
power to vote. The Class D Stock possesses the right to 102 votes per share. The
Class E Stock possesses the right to 1 vote per share. After the Acquisition and
the Financings there will be 5,000 shares of Class D Stock outstanding, and
490,000 shares of Class E Stock outstanding.
The following table sets forth certain information concerning beneficial
ownership of Holdings' capital stock as of February 2, 1997, by (i) each person
which is a beneficial owner of more than 5% of the outstanding voting stock,
(ii) each director of the Company who could be deemed to be the beneficial owner
of shares of Holdings' capital stock, (iii) each current Named Executive Officer
who could be deemed to be the beneficial owner of shares of Holdings' capital
stock and (iv) all directors and executive officers of the Company as a group.
PERCENT
NAME AND ADDRESS OF OF TOTAL
BENEFICIAL OWNER NUMBER VOTING POWER
- ---------------------------------------------------------------------- ------- ------------
CLASS D VOTING STOCK
INVESTCORP S.A.(2)(3)................................................. 5,000 51%
37 Rue Notre-Dame, Luxembourg
SIPCO Limited(3)(4)................................................... 5,000 51%
P.O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands
CIP Limited(3)(5)..................................................... 4,600 47%
P.O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands
CLASS E VOTING STOCK
Carmel Trust(3)....................................................... 490,000(6) 49%
c/o Sonnenschein Nath & Rosenthal
Suite 8000, Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606
Jules Trump........................................................... --(6) --
c/o CSK Auto, Inc.
645 E. Missouri Avenue
Phoenix, Arizona 85012
Eddie Trump........................................................... --(6) --
c/o CSK Auto, Inc.
645 E. Missouri Avenue
Phoenix, Arizona 85012
Robert Smith.......................................................... --(6) --
c/o Sonnenschein Nath & Rosenthal
Suite 8000, Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606
CLASS D VOTING STOCK AND CLASS E VOTING STOCK
All directors and executive officers as a group (17 persons).......... --(6) --
- ---------------
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or to direct the disposition of, a security.
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(2) Investcorp does not own any stock in Holdings. The number of shares shown as
owned by Investcorp includes all of the shares owned by Investcorp
Investment Equity Limited, a Cayman Islands corporation, and a wholly-owned
subsidiary of Investcorp. Investcorp owns no stock in Ballet Limited, Denary
Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited,
Quill Limited, Radial Limited, Shoreline Limited, Zinnia Limited, or the
beneficial owners of these entities. Ballet Limited, Denary Limited, Gleam
Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited,
Radial Limited, Shoreline Limited and Zinnia Limited each is a Cayman
Islands corporation. Investcorp may be deemed to share beneficial ownership
of the shares of voting stock held by these entities because the entities
have entered into revocable management services or similar agreements with
an affiliate of Investcorp pursuant to which each of such entities has
granted such affiliate the authority to direct the voting and disposition of
the Holdings voting stock owned by such entity for so long as such agreement
is in effect. Investcorp is a Luxembourg corporation.
(3) The stockholders of Holdings, Holdings and the Company have entered into a
stockholders' agreement with respect to the voting, and in certain
circumstances the disposition, of the shares of capital stock of Holdings.
See "Certain Transactions -- Stockholders' Agreement."
(4) SIPCO Limited may be deemed to control Investcorp through its ownership of a
majority of a company's stock that indirectly owns a majority of
Investcorp's shares.
(5) CIP Limited ("CIP") owns no stock in Holdings. CIP indirectly owns less than
0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited. CIP may be deemed to share
beneficial ownership of the shares of voting stock of Holdings held by such
entities because CIP acts as a director of such entities and the ultimate
beneficial shareholders of each of those entities have granted to CIP
revocable proxies in companies that own those entities' stock. None of the
ultimate beneficial owners of such entities beneficially owns individually
more than 5% of Holdings voting stock.
(6) The Trustee of Carmel is Cantrade Trust Company Limited. The Agreement
pursuant to which Carmel was established in 1977 (the "Carmel Agreement")
designates certain Protectors who must authorize any action taken by the
Trustee and who have the authority to discharge the Trustee and to appoint
substitute trustees. These Protectors are Saul Tobias Bernstein, Gerrit Van
Reimsdijk and Robert Smith (who is also a director of the Company). These
Protectors are not otherwise associated with the Company or Carmel. The
Carmel Agreement provides that Carmel shall continue until 21 years after
the death of the last survivor of the descendants of certain persons living
on the date it was established (the "Carmel Term"). Certain members of the
families of Jules Trump (a director of the Company) and Eddie Trump (a
director of the Company) may appoint beneficiaries, or themselves become
beneficiaries (by appointment or at the end of the Carmel Term without
appointment). If there are no such beneficiaries at the end of the Carmel
Term, the assets of Carmel will be paid out to certain charitable
institutions. Jules Trump, Eddie Trump and Robert Smith each disclaim
beneficial ownership of such shares.
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CREDIT AGREEMENT
GENERAL
The Credit Agreement (the "Senior Credit Facility"), dated October 30,
1996, entered into among the Company, the several lenders from time to time
parties thereto (collectively the "Lenders"), The Chase Manhattan Bank, as the
administrative agent for the Lenders (the "Administrative Agent"), provides for
a $200.0 million term and revolving loan credit facility (collectively, the
"Loans").
The Loans are collateralized by a first priority security interest in
substantially all the personal property of the Company. Holdings has also issued
a guarantee of the Loans, which guarantee is secured by a pledge by Holdings of
all issued and outstanding capital stock of the Company. Each of the current
U.S. subsidiaries of the Company has also issued a guarantee of the Loans, which
is collateralized by a first priority security interest in substantially all
personal property of such subsidiary. The Company has pledged the issued and
outstanding capital stock of each such subsidiary to collateralize indebtedness
under the Senior Credit Facility. Any future U.S. subsidiaries of the Company
will also be required to issue a guarantee of the Loans which will be similarly
collateralized and the Company is required to pledge the issued and outstanding
capital stock of such subsidiary as well.
TERM LOANS
The Senior Credit Facility includes a $100.0 million term loan facility. As
of February 2, 1997, $100.0 million was outstanding under the term loan
facility. The term loan has a final maturity date of the seventh anniversary of
the closing date of the Senior Credit Facility. The principal amount of the term
loan will be repaid in installments over the seven years totaling $1.0 million
in fiscal year 1997, $1.0 million in fiscal year 1998, $1.0 million in fiscal
year 1999, $1.0 million in fiscal year 2000, $26.0 million in fiscal year 2001,
$35.0 million in fiscal year 2002 and $35.0 million in fiscal year 2003.
REVOLVING CREDIT FACILITY
The Senior Credit Facility includes a $100.0 million revolving credit
facility. The Company is entitled to draw amounts under the revolving credit
portion of the Senior Credit Facility, subject to availability pursuant to a
borrowing base requirement, in order to meet the Company's working capital
requirements, including issuing letters of credit. The borrowing base is based
upon the sum of certain percentages of Eligible Inventory (as defined in the
Senior Credit Facility) of the Company and its subsidiaries located in
distribution centers, regional depots and stores. As of February 2, 1997, $38.0
million was outstanding under the revolving credit portion and the Company had
$62.0 million of existing availability thereunder, subject to borrowing base
restrictions which would have permitted $43.1 million of such amount to be
borrowed. The revolving credit portion has a final maturity date of October 30,
2001.
INTEREST RATES
The Senior Credit Facility accrues interest at either the Alternate Base
Rate (the "Alternate Base Rate") or an adjusted Eurodollar Rate (the "Eurodollar
Rate"), at the option of the Company, plus the applicable interest margin. The
Alternate Base Rate at any time is determined to be the highest of (i) the
Federal Funds Rate plus 1/2 of 1% per annum, (ii) the Base CD Rate (as defined
below) plus 1% per annum and (iii) The Chase Manhattan Bank's prime rate. The
applicable interest margin with respect to loans made under the revolving credit
facility is 1.50% per annum with respect to loans that accrue interest at the
Alternate Base Rate and 2.50% per annum with respect to loans that accrue
interest at the Eurodollar Rate. The applicable interest margin is 2.00% with
respect to any portion of the term loan that accrues interest at the Alternate
Base Rate and 3.00% per annum with respect to any portion of the term loan that
accrues interest at the Eurodollar Rate. As used herein, "Base CD Rate" means
the secondary market rate for three-month certificates of deposit of money
center banks, adjusted for reserves and assessments.
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MANDATORY AND OPTIONAL PREPAYMENTS
The Senior Credit Facility requires that upon an offering by the Company,
Holdings or any subsidiary of the Company of its common or other voting stock to
any person other than a current stockholder or an affiliate thereof, 50% of the
net proceeds from such offering, or upon the receipt of proceeds from certain
assets sales and exchanges, or upon the incurrence of any additional
indebtedness (other than indebtedness permitted under the Senior Credit
Facility), 100% of the net proceeds from such incurrence, sale or exchange, will
be applied toward the prepayment of indebtedness under the Senior Credit
Facility. Such payments are required to be applied first to the prepayment of
the term loan and, second, to reduce permanently the revolving credit
commitments. In addition, the Senior Credit Facility requires that 75% of the
Company's Excess Cash Flow (as defined in the Senior Credit Facility) will be
applied toward the prepayment of the term loan under the Senior Credit Facility.
Subject to certain conditions, the Company may, from time to time, make optional
prepayments of Loans without premium or penalty.
COVENANTS
The Senior Credit Facility imposes certain covenants and other requirements
on the Company and its subsidiaries. In general, the affirmative covenants
provide for mandatory reporting by the Company of financial and other
information to the Lenders and notice by the Company to the Lenders upon the
occurrence of certain events. The affirmative covenants also include standard
covenants requiring the Company to operate its business in an orderly manner and
consistent with past practices.
The Senior Credit Facility contains certain negative covenants and
restrictions on actions by the Company and its subsidiaries that, among other
things, restrict: (i) the incurrence and existence of indebtedness; (ii)
consolidations, mergers and sales of assets; (iii) the incurrence and existence
of liens or other encumbrances; (iv) the incurrence and existence of contingent
obligations; (v) the payment of dividends and repurchases of common stock; (vi)
prepayments and amendments of certain subordinated debt instruments; (vii)
investments, loans and advances; (viii) capital expenditures; (ix) changes in
fiscal year; (x) certain transactions with affiliates; and (xi) changes in lines
of business. In addition, the Senior Credit Facility requires that the Company
comply with specified financial ratios and tests, including minimum cash flow, a
maximum ratio of indebtedness to cash flow and a minimum interest coverage
ratio.
EVENTS OF DEFAULT
The Senior Credit Facility specifies certain customary events of default
including non-payment of principal, interest or fees, violation of covenants,
inaccuracy of representations and warranties in any material respect, cross
default to certain other indebtedness and agreements, bankruptcy and insolvency
events, material judgments and liabilities, change of control, and
unenforceability of certain documents under the Senior Credit Facility.
FEES AND EXPENSES
The Company is required to pay to the Administrative Agent, for the account
of each Lender, 1/2 of 1% per annum of the average daily amount of the available
revolving credit commitment of each Lender. The Company is also required to pay
to the Administrative Agent an agent's fee in an amount agreed between the
Company and the Administrative Agent.
The description of the Senior Credit Facility set forth above does not
purport to be complete and is qualified in its entirety by reference to the
Senior Credit Facility and related guarantees and pledge agreements, copies of
which are available from the Company upon request.
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DESCRIPTION OF NOTES
The terms of the Notes are identical in all material respects to the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes. The description of the Notes contained herein assumes that all
Old Notes are exchanged for Notes in the Exchange Offer. To the extent that Old
Notes remain outstanding after the consummation of the Exchange Offer, Old Notes
and Notes will be repurchased pro rata pursuant to the repurchase provisions
contained herein. The definitions of certain terms used in the following summary
are set forth below under "-- Certain Definitions."
GENERAL
The Notes will be issued pursuant to the Indenture, dated as of October 30,
1996 (the "Indenture"), among the Company, Kragen Auto Supply Co. and Schuck's
Distribution Co., as Subsidiary Guarantors, and Wells Fargo Bank, N.A., as
trustee (the "Trustee"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are subject to all
such terms, and Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following is a summary of all
material provisions of the Indenture, but does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. A copy if the Indenture is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
As of date of the issuance of the notes (the "Issue Date") none of the
Company's Subsidiaries will be Unrestricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to many of the restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $125.0 million
and will mature on November 1, 2006. Interest on the Notes will accrue at the
rate of 11% per annum and will be payable semi-annually in arrears on May 1 and
November 1, commencing on November 1, 1997, to Holders of record on the
immediately preceding April 15 and October 15. Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Additionally, interest on the
Notes will accrue from the last interest payment date on which interest was paid
on the Old Notes surrendered in exchange therefore, or if no interest has been
paid on the Old Notes, from the date of the original issuance of the Old Notes.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal of, premium, if any, and interest on the Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest may be made by check mailed to the Holders of the Notes at their
respective addresses set forth in the register of Holders of Notes; provided
that all payments with respect to the Global Note and Certificated Notes (each
as defined herein) the Holders of whom, in the case of Certificated Notes, have
given wire transfer instructions to the Company, will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's office
or agency in New York will be the office of the Trustee maintained for such
purpose. The Notes will be issued in denominations of $1,000 and integral
multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, and interest on, the Notes
will be subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full of all Senior Indebtedness, whether outstanding on the
Issue Date or thereafter incurred. In addition, as set forth in "-- Subsidiary
Guarantees" below, the Subsidiary Guarantees will be general unsecured
obligations of the Subsidiary Guarantors, subordinated in right of payment to
the prior payment in full of all Guarantor Senior Indebtedness.
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Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full of all such Senior Indebtedness (including interest
after the commencement of any such proceeding at the rate specified in the
applicable Senior Indebtedness whether or not such interest is an allowed claim
enforceable against the debtor in a bankruptcy case under Title 11 of the United
States Code and including, in the case of all Designated Senior Indebtedness,
all Obligations with respect thereto) before the Holders of Notes will be
entitled to receive any payment with respect to the Notes, and until all amounts
with respect to Senior Indebtedness are paid in full, any distribution to which
the Holders of Notes would be entitled shall be made to the holders of Senior
Indebtedness (except payments made from the trust described under "-- Legal
Defeasance and Covenant Defeasance" and except that Holders of the Notes may
receive securities so long as (i) the Notes are not treated in any case or
proceeding or other event described above as part of the same class of claims as
the Senior Indebtedness or any class of claim on a parity with or senior to the
Senior Indebtedness for any payment or distribution, (ii) such securities are
subordinated at least to the same extent as the Notes to Senior Indebtedness of
the Company and any securities issued in exchange for such Senior Indebtedness
and (iii) such securities are authorized by an order or decree of a court of
competent jurisdiction in a reorganization proceeding under any applicable
bankruptcy, insolvency or similar law which gives effect to the subordination of
the Notes to Senior Indebtedness in a manner and with an effect which would be
required if this parenthetical clause were not included in this paragraph;
provided that the Senior Indebtedness is assumed by the new corporation, if any,
resulting from any such reorganization or readjustment and issuing such
securities).
The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities as described above or from the trust
described under "-- Legal Defeasance and Covenant Defeasance") if (i) a default
in the payment of the principal of, premium, if any, or interest on Designated
Senior Indebtedness occurs and is continuing beyond any applicable period of
grace or (ii) any other default occurs and is continuing with respect to
Designated Senior Indebtedness that permits holders of the Designated Senior
Indebtedness as to which such default relates to accelerate its maturity and the
Trustee receives a notice of such default (a "Payment Blockage Notice") from the
Company or the representative of the holders of any Designated Senior
Indebtedness. Payments on the Notes may and will be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Indebtedness has been accelerated. No new period of payment
blockage may be commenced unless and until 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the trustee will be, or be made, the basis for a subsequent
Payment Blockage Notice.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation, insolvency or similar proceeding, Holders of Notes may recover
less ratably than creditors of the Company who are holders of Senior
Indebtedness. See "Risk Factors -- Subordination." As of February 2, 1997, the
Company and its Subsidiaries had outstanding an aggregate principal amount of
approximately $160.7 million of Senior Indebtedness and Guarantor Senior
Indebtedness (without duplication), which would rank senior in right of payment
to the Notes and the Subsidiary Guarantees, respectively. The Indenture limits,
subject to certain financial tests, the amount of additional Indebtedness,
including Senior Indebtedness and Guarantor Senior Indebtedness, that the
Company and its Subsidiaries, respectively, can incur. See "Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock."
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SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be fully,
unconditionally and jointly and severally guaranteed pursuant to the Subsidiary
Guarantees in effect on the Issue Date and any future Subsidiary Guarantees on a
senior subordinated basis by the initial Subsidiary Guarantors and any
Subsidiaries that become Subsidiary Guarantors after the Closing Date. The
Subsidiary Guarantees of the Subsidiary Guarantors will be subordinated to the
prior payment in full of all Guarantor Senior Indebtedness. As of February 2,
1997, the Company and its Subsidiaries had outstanding an aggregate principal
amount of approximately $160.7 million of Senior Indebtedness and Guarantor
Senior Indebtedness (without duplication), which would rank senior in right of
payment to the Notes and the Subsidiary Guarantees, respectively.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
will be limited so as not to constitute a fraudulent conveyance under applicable
law.
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another corporation, Person or entity whether or not affiliated with
such Subsidiary Guarantor unless, subject to the provisions of the immediately
following paragraph, (i) the Person formed by or surviving any such
consolidation or merger (if other than such Subsidiary Guarantor) assumes all
the obligations of such Subsidiary Guarantor under its respective Subsidiary
Guarantee pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee under the Indenture, (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists, and (iii)
such Subsidiary Guarantor, or any Person formed by or surviving any such
consolidation or merger, (A) would have Consolidated Net Worth (immediately
after giving effect to such transaction) equal to or greater than the
Consolidated Net Worth of such Subsidiary Guarantor immediately preceding the
transaction and (B) would be permitted by virtue of the Company's pro forma
Fixed Charge Coverage Ratio to incur, immediately after giving effect to such
transaction, at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the covenant described in "-- Incurrence
of Indebtedness and Issuance of Preferred Stock"; provided that the foregoing
will not apply to the merger of two or more Subsidiary Guarantors with and into
each other or with or into the Company.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the Capital Stock of any
Subsidiary Guarantor, by way of merger, consolidation or otherwise, then such
Subsidiary Guarantor (in the event of a sale or other disposition of all of the
Capital Stock of such Subsidiary Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Subsidiary Guarantor) will be released and relieved of any obligations
under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "-- Repurchase at the Option of Holders -- Asset Sales."
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to November
1, 2001 except as described below, with the proceeds of an equity offering.
Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon, if any, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on November 1 of the years indicated below:
YEAR PERCENTAGE
------------------------------------------------------------------ ----------
2001.............................................................. 105.500%
2002.............................................................. 103.667
2003.............................................................. 101.833
2004 and thereafter............................................... 100.000
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In addition, at any time on or prior to November 1, 1999, the Company may
(but will not have the obligation to) redeem up to 35% of the original aggregate
principal amount of the Notes at a redemption price of 110% of the principal
amount thereof, in each case plus accrued and unpaid interest thereon, if any,
to the redemption date, with the net proceeds of an Equity Offering; provided
that at least 65% of the original aggregate principal amount of Notes remain
outstanding immediately after the occurrence of such redemption; and provided,
further that such redemption will occur within 60 days of the date of the
closing of such Equity Offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, by lot or
by such method as the Trustee will deem fair and appropriate; provided that no
Notes of $1,000 or less will be redeemed in part. Notices of redemption will be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note will state the portion of the principal amount thereof
to be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, interest ceases to accrue
on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
The Indenture provides that upon the occurrence of a Change of Control,
each Holder of Notes will have the right to require the Company to repurchase
all or any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date of
purchase (the "Change of Control Payment"). Within 30 days following any Change
of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes pursuant to the procedures required by the Indenture and
further described below. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations to
the extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change of
Control provisions in the Indenture, the Company shall comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under the Change of Control provisions in the Indenture
by virtue thereof.
The Change of Control Offer will remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Change
of Control Offer Period (the "Change of Control Purchase Date"), the Company
will purchase all Notes tendered in response to the Change of Control Offer.
Payment for any Notes so purchased will be made in the same manner as interest
payments are made.
If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to Holders who tender Notes pursuant to the Change of Control Offer.
Upon the commencement of a Change of Control Offer, the Company will send,
by first class mail, a notice to the Trustee and each of the Holders, with a
copy to the Trustee. The notice will contain all
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instructions and materials necessary to enable such Holders to tender Notes
pursuant to the Change of Control Offer. The Change of Control Offer will be
made to all Holders. The notice, which will govern the terms of the Change of
Control Offer, will state:
(a) that the Change of Control Offer is being made pursuant to this
covenant and the length of time the Change of Control offer will remain
open;
(b) the purchase price and the Change of Control Purchase Date;
(c) that any Note not tendered or accepted for payment will continue
to accrue interest;
(d) that, unless the Company defaults in making such payment, any Note
accepted for payment pursuant to the Change of Control Offer will cease to
accrue interest after the Change of Control Purchase Date;
(e) that Holders may tender all or any portion of the Notes registered
in the name of such Holder and that any portion of a Note tendered must be
tendered in a principal amount of $1,000 or an integral multiple thereof;
(f) that Holders electing to have a Note purchased pursuant to any
Change of Control Offer will be required to surrender the Note, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the
Note completed, or transfer by book-entry transfer, to the Company, a
Depositary, if appointed by the Company, or a Paying Agent at the address
specified in the notice at least three days before the Change of Control
Purchase Date; and
(g) that Holders will be entitled to withdraw their election if the
Company, the Depositary or the Paying Agent, as the case may be, receives,
not later than the expiration of the Change of Control Offer Period, a
telegram, telex, facsimile transmission or letter setting forth the name of
the Holder, the principal amount of the Note the Holder delivered for
purchase and a statement that such Holder is withdrawing his election to
have such Note purchased.
On the Change of Control Purchase Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee, the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof.
Prior to complying with the provisions of this covenant, but in any event
within 30 days following a Change of Control, the Company will either repay all
outstanding Senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding Senior Indebtedness to permit the
repurchase of Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration (including by way of
relief from, or by any other Person assuming sole responsibility for, any
liabilities, contingent or otherwise) at the time of such Asset Sale at least
equal to the fair market value, and in the case of a lease of assets, a lease
providing for rent and other conditions which are no less favorable to the
Company (or the Subsidiary, as the case may be) in any material respect than the
then prevailing market conditions (evidenced in each case by a resolution of the
Board of Directors of such entity set forth in an Officers'
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Certificate delivered to the Trustee) of the assets or Equity Interests sold or
otherwise disposed of, and (ii) at least 80% (100% in the case of lease
payments) of the consideration therefor (excluding contingent liabilities
assumed by the transferee of any such assets) received by the Company or such
Subsidiary is in the form of cash or Cash Equivalents paid at the closing
thereof; provided that the amount of (A) any liabilities (as shown on the
Company's or such Subsidiary's most recent balance sheet or in the notes
thereto, excluding contingent liabilities), of the Company or any Subsidiary
that are assumed by the transferee of any such assets and (B) any notes,
securities or other obligations received by the Company or any such Subsidiary
from such transferee that are promptly, but in no event more than 30 days after
receipt, converted by the Company or such Subsidiary into cash (to the extent of
the cash received), will be deemed to be cash for purposes of this provision.
The Company or any of its Subsidiaries may apply the Net Proceeds from such
Asset Sale, at its option, (i) to permanently reduce Senior Term Debt within 12
months from the later of the date of such Asset Sale or the receipt of such Net
Proceeds, (ii) to permanently reduce Senior Revolving Debt (and to
correspondingly reduce commitments with respect thereto) within 12 months from
the later of the date of such Asset Sale or the receipt of such Net Proceeds,
(iii) to permanently prepay, repay or purchase Senior Indebtedness or Guarantor
Senior Indebtedness of the Company or a Subsidiary Guarantor (other than Senior
Term Debt or Senior Revolving Debt) or Indebtedness (other than preferred stock)
of the Company or a Subsidiary Guarantor (that, in the case of Indebtedness
other than Senior Indebtedness or Guarantor Senior Indebtedness, is required by
its terms to be prepaid, repaid or repurchased as a result of such Asset Sale)
(and to correspondingly reduce any applicable commitments with respect thereto)
within 12 months from the later of the date of such Asset Sale or the receipt of
such Net Proceeds or (iv) to reinvest in Additional Assets (including by means
of an Investment in Additional Assets by a Subsidiary with Net Proceeds received
by the Company or another Subsidiary) within 12 months from the later of the
date of such Asset Sale or the receipt of such Net Proceeds. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce Senior
Revolving Debt or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5 million, the Company will be required to make an offer to
all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of purchase, in
accordance with the procedures set forth in the Indenture and as described
below. If the aggregate principal amount of Notes surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee will select the Notes to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds will be reset at zero. The Company will comply with
the requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations to the extent such laws and regulations are applicable in
connection with such a repurchase of the Notes. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sale
provisions in the Indenture, the Company shall comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions in the Indenture by virtue thereof.
Notwithstanding the foregoing, if an Asset Sale Offer is commenced and
securities of the Company ranking pari passu in right of payment with the Notes
are outstanding at the date of commencement thereof, the terms of which provide
that a substantially similar offer must be made with respect thereto, then the
Asset Sale Offer shall be made concurrently with such offer, and securities of
each issue which the holders of securities of such issue elect to have purchased
will be accepted pro rata in proportion to the aggregate principal amount
thereof.
The Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Asset Sale Offer Period"). No later
than five Business Days after the termination of the Offer Period (the "Asset
Sale Purchase Date"), the Company will purchase the principal amount of Notes
required to be purchased pursuant to this covenant (the "Asset Sale Offer
Amount") or, if less than the Asset Sale Offer Amount has
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been tendered, all Notes tendered in response to the Asset Sale Offer. Payment
for any Notes so purchased will be made in the same manner as interest payments
are made.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
will be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest will be payable to
Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company will send, by
first class mail, a notice to the Trustee and each of the Holders, with a copy
to the Trustee. The notice will contain all instructions and materials necessary
to enable such Holders to tender Notes pursuant to the Asset Sale Offer. The
Asset Sale Offer will be made to all Holders. The notice, which will govern the
terms of the Asset Sale Offer, will state:
(a) that the Asset Sale Offer is being made pursuant to this covenant
and the length of time the Asset Sale Offer will remain open;
(b) the Asset Sale Offer Amount, the purchase price and the Asset Sale
Purchase Date;
(c) that any Note not tendered or accepted for payment will continue
to accrue interest;
(d) that, unless the Company defaults in making such payment, any Note
accepted for payment pursuant to the Asset Sale Offer will cease to accrue
interest after the Asset Sale Purchase Date;
(e) that Holders may tender all or any portion of the Notes registered
in the name of such Holder and that any portion of a Note tendered must be
tendered in a principal amount of $1,000 or an integral multiple thereof;
(f) that Holders electing to have a Note purchased pursuant to any
Asset Sale Offer will be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, or transfer by book-entry transfer, to the Company, a
Depositary, if appointed by the Company, or a Paying Agent at the address
specified in the notice at least three days before the Asset Sale Purchase
Date;
(g) that Holders will be entitled to withdraw their election if the
Company, the Depositary or the Paying Agent, as the case may be, receives,
not later than the expiration of the Offer Period, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder delivered for purchase and a
statement that such Holder is withdrawing his election to have such Note
purchased;
(h) that, if the aggregate principal amount of Notes surrendered by
Holders exceeds the Asset Sale Offer Amount, the Company will select the
Notes to be purchased on a pro rata basis (with such adjustments as may be
deemed appropriate by the Company so that only Notes in denominations of
$1,000, or integral multiples thereof, will be purchased); and
(i) that Holders whose Notes were purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered (or transferred by book-entry transfer).
On or before the Asset Sale Purchase Date, the Company will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Notes or portions thereof pursuant to the Asset Sale
Offer, or if less than the Asset Sale Offer Amount has been tendered, all Notes
tendered, and will deliver to the Trustee an Officers' Certificate stating that
such Notes or portions thereof were accepted for payment by the Company in
accordance with the terms of this covenant. The Company, the Depositary or the
Paying Agent, as the case may be, will promptly (but in any case not later than
five days after the Asset Sale Purchase Date) mail or deliver to each tendering
Holder an amount equal to the purchase price of the Notes tendered by such
Holder and accepted by the Company for purchase, and the Company will promptly
issue a new Note, and the Trustee, upon written request from the Company will
authenticate and mail or deliver such new Note to such Holder, in a principal
amount equal to any unpurchased portion of the Note surrendered.
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Any Note not so accepted will be promptly mailed or delivered by the Company to
the Holder thereof. The Company will publicly announce the results of the Asset
Sale Offer on the Asset Sale Purchase Date.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to directly or indirectly: (i) declare or pay any dividend
or make any distribution on account of the Company's or any of its Subsidiaries'
Equity Interests (including, without limitation, any payment in connection with
any merger or consolidation involving the Company) (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
Company or dividends or distributions payable to the Company or any Subsidiary
of the Company (and, if such Subsidiary is not a Wholly Owned Subsidiary, to its
other shareholders on a pro rata basis)), (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of the Company or any
Subsidiary of the Company (other than any such Equity Interests owned by the
Company or any Wholly Owned Subsidiary of the Company that is a Subsidiary
Guarantor), (iii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated to
the Notes, prior to scheduled maturity, or applicable scheduled repayment or
scheduled sinking fund payment date with respect thereto and in the applicable
amounts so required (other than any of the foregoing with respect to such
Indebtedness in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case, due within one year of the date of
such transaction and in the applicable amounts so required), other than through
the purchase or acquisition by the Company of Indebtedness through the issuance
in exchange therefor of Equity Interests (other than Disqualified Stock) or (iv)
make any Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default will have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described under "-- Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the
Closing Date (excluding Restricted Payments permitted by any of clauses
(ii), (iii), (iv), (v), (vi) and (vii) (B) of the next succeeding
paragraph), is less than the sum of (i) 50% of the Consolidated Net Income
of the Company for the period (taken as one accounting period) from the
beginning of the fiscal quarter in which the Closing Date occurred to the
end of the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by the Company from the issue or sale since the Closing Date of
Equity Interests of the Company and 100% of the amount by which
Indebtedness of the Company or its Subsidiaries is reduced on the Company's
balance sheet upon the conversion or exchange thereof subsequent to the
Closing Date into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary or an Unrestricted
Subsidiary of the Company and other than Disqualified Stock or debt
securities that have been converted into Disqualified Stock), plus (iii)
100% of any dividends received by the Company or a Wholly Owned Subsidiary
that is a Subsidiary Guarantor after the Closing Date from an Unrestricted
Subsidiary of the Company, plus (iv) 100% of the cash proceeds realized
upon the sale of any Unrestricted Subsidiary (less the amount of any
reserve established for purchase price adjustments and less the maximum
amount of any indemnification or similar contingent obligation for the
benefit of the purchaser, any of its Affiliates or any other third party in
such sale, in each case as adjusted for any permanent reduction in any such
amount on or
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after the date of such sale, other than by virtue of a payment made to such
Person) following the Closing Date, plus (v) to the extent not otherwise
included in (iv) above, to the extent that any Restricted Investment that
was made after the Closing Date is sold for cash or otherwise liquidated or
repaid for cash, the amount of cash proceeds received with respect to such
Restricted Investment, plus (vi) $10 million.
The foregoing provision will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the making of any Restricted Investment in exchange for, or out
of the proceeds of the substantially concurrent sale (other than to a
Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); provided that any net cash proceeds that are utilized
for such Restricted Investment, and any Net Income resulting therefrom,
will be excluded from clauses (c)(i) and (c)(ii) of the preceding
paragraph;
(iii) the redemption, repurchase, retirement or other acquisition of
any Equity Interest of the Company in exchange for, or out of the proceeds
of, the substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than any
Disqualified Stock); provided that any net cash proceeds that are utilized
for any such redemption, repurchase, retirement or other acquisition, and
any Net Income resulting therefrom, will be excluded from clauses (c)(i)
and (c)(ii) of the preceding paragraph;
(iv) the defeasance, redemption or repurchase of Indebtedness that is
subordinated to the Notes with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness which was incurred to refinance such
subordinated Indebtedness or the substantially concurrent sale (other than
to a Subsidiary of the Company) of Equity Interests of the Company (other
than Disqualified Stock); provided that any net cash proceeds that are
utilized for any such defeasance, redemption or repurchase, and any Net
Income resulting therefrom, will be excluded from clauses (c)(i) and
(c)(ii) of the preceding paragraph;
(v) the repurchase, redemption or other acquisition or retirement for
value of any subordinated Indebtedness from Net Proceeds to the extent
permitted by the covenant described under "-- Asset Sales;" provided that
any Net Proceeds that are utilized for any such defeasance, redemption or
repurchase and any Net Income resulting therefrom will be excluded from
clauses (c)(i) and (c)(ii) of the preceding paragraph;
(vi) the payment by the Company of (A) certain standby commitment fees
to Invifin S.A. in connection with the Senior Credit Facility in an
aggregate amount not to exceed $1,575,000, (B) certain advisory fees to
Investcorp International Inc. ("International") in connection with the
Acquisition in an aggregate amount not to exceed $1,275,000, (C) certain
management advisory and consulting fees to International pursuant to a
management agreement entered into in connection with the Acquisition
between International and the Company (x) in an aggregate amount not to
exceed $5,000,000 for the first five years after the Closing Date and (y)
in an aggregate amount not to exceed $1,000,000 in any fiscal year
thereafter, (D) certain arrangement fees to International in connection
with the Senior Credit Facility in an aggregate amount not to exceed
$3,150,000 and (E) certain fees to Transatlantic in connection with a loan
made to the Company prior to the Acquisition in an aggregate amount not to
exceed $1,000,000;
(vii) the payment of dividends, other distributions or other amounts
by the Company to Holdings (A) in amounts equal to the amounts required for
Holdings to pay franchise taxes and other fees required to maintain its
corporate existence and provide for other operating costs; provided that
the aggregate amount of such payments, dividends and distributions pursuant
to this clause (vii)(A) shall not exceed $250,000 in any fiscal year, (B)
in amounts equal to amounts required for Holdings to pay federal, state and
local income taxes to the extent such income taxes are attributable to the
income of the Company and its Subsidiaries (and, to the extent of amounts
actually received from its Unrestricted Subsidiaries, in
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amounts required to pay such taxes to the extent attributable to the income
of such Unrestricted Subsidiaries), (C) in amounts equal to amounts
expended by Holdings to redeem, or otherwise acquire or retire for value
any Equity Interest of Holdings held by any member of Holdings' or the
Company's management pursuant to any management agreement or stock option
agreement and amounts loaned or advanced by Holdings to any member of
Holdings' or the Company's management to enable such person to purchase any
Equity Interests of Holdings; provided that the aggregate amounts
distributed to Holdings pursuant to this clause (vii)(C) will not exceed
$8,000,000 in the aggregate (net of cash proceeds received by Holdings from
subsequent reissuances of Equity Interests to new members of management,
except to the extent such proceeds are contributed by Holdings to the
Company), (D) representing a portion of the proceeds of any Equity Offering
that occurs pursuant to the sale by the Company of its Equity Interests
other than Disqualified Stock; provided that the aggregate amount of such
dividend may not exceed the amount expended by Holdings to redeem the
Holdings Notes, (E) in an aggregate amount not to exceed $4,000,000 to
enable Holdings to pay certain fees to Southwest Finance Limited in
connection with the issuance of the Holdings Notes and (F) to reimburse
Holdings for costs, fees and expenses incident to a registration of any of
the Capital Stock of Holdings for a primary offering under the Securities
Act, so long as (x) the net proceeds of such offering (if it is completed)
are contributed to, or otherwise used for the benefit of, the Company and
(y) the costs, fees and expenses are allocated among Holdings and any
selling shareholders in such proportion as is required by an applicable
shareholders agreement or, to the extent no applicable shareholders
agreement exists, as is appropriate to reflect the relative proceeds
received by Holdings and such selling shareholders; and
(viii) the payment by the Company to members of management of the
Company in connection with the termination of an equity participation
program as a result of the Acquisition, provided that such payments do not
exceed $19,900,000 in the aggregate, of which the last $5,966,000 may be
paid by the Company under this clause (viii) only to the extent payment of
such amount is received by the Company from the Carmel Trust or an
Affiliate thereof;
provided that in the case of clauses (iv), (v), (vi), (vii)(E) and (vii)(F) of
this paragraph, no Default or Event of Default shall have occurred and be
continuing and, in the case of clauses (vii)(C), (vii)(D) and (viii) of this
paragraph, no Default referred to in clauses (i) or (ii) under "Events of
Default and Remedies" shall have occurred and be continuing, at the time of such
Restricted Payment or would occur as a consequence thereof.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary if no Default or Event of Default would be in existence following
such designation. For purposes of making such determination, all outstanding
Investments by the Company and its Subsidiaries (except to the extent repaid in
cash) in the Subsidiary so designated will be deemed to be Restricted Payments
at the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) will be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company will deliver to the
Trustee an Officer's Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this covenant were computed, which calculations may be based upon the Company's
latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries and Unrestricted Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guaranty or otherwise become
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directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Indebtedness) and
that the Company will not issue any Disqualified Stock and will not permit any
of its Subsidiaries and Unrestricted Subsidiaries to issue any shares of
preferred stock; provided that the Company may incur Indebtedness (including
Acquired Indebtedness) or issue shares of Disqualified Stock and the Company's
Subsidiaries that are Subsidiary Guarantors may incur Indebtedness and issue
preferred stock if: (i) the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been
(A) at least 2 to 1 if the date on which such additional Indebtedness is
incurred, such Disqualified Stock is issued or, in the case of any Subsidiary
Guarantor, such preferred stock is issued occurs prior to October 30, 1998, or
(B) at least 2.25 to 1 if such date occurs thereafter, in each case determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, or, in the case of any Subsidiary Guarantor,
such preferred stock had been issued, as the case may be, at the beginning of
such four-quarter period and (ii) no Default or Event of Default will have
occurred and be continuing or would occur as a consequence thereof; provided
that no Guarantee may be incurred pursuant to this paragraph, unless the
guaranteed Indebtedness is incurred by the Company or a Subsidiary pursuant to
this paragraph.
The foregoing provisions will not apply to:
(i) the incurrence by the Company of Senior Term Debt and Senior
Revolving Debt and letters of credit (and Guarantees thereof by
Subsidiaries that are Subsidiary Guarantors) in an aggregate principal
amount at any time outstanding (with letters of credit being deemed to have
a principal amount equal to the maximum potential liability of the Company
and its Subsidiaries thereunder) not to exceed an amount equal to $200
million, less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the outstanding amount of the commitments
with respect to such Indebtedness pursuant to the covenant described under
"-- Asset Sales;"
(ii) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes and by the Subsidiaries of Indebtedness represented by the Subsidiary
Guarantees;
(iv) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or Purchase Money Obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $25 million at
any time outstanding;
(v) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund
Indebtedness that was incurred in compliance with the covenant described
under the first paragraph of the "Incurrence of Indebtedness and Issuance
of Preferred Stock" or under clauses (ii) and (iii) of this paragraph;
(vi) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Wholly Owned Subsidiaries or between or among any Wholly Owned
Subsidiaries; provided that (A) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
Person other than a Wholly Owned Subsidiary and (B) any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or a Wholly Owned Subsidiary will be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be;
(vii) the incurrence by the Company or any of its Subsidiaries that
are Subsidiary Guarantors of Hedging Obligations that are incurred for the
purpose of fixing or hedging interest rate risk with respect to any
floating rate Indebtedness that is permitted by the Indenture to be
incurred;
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(viii) the incurrence by the Company or any of its Subsidiaries that
are Subsidiary Guarantors of Indebtedness (in addition to Indebtedness
permitted by any other clause of this paragraph) in an aggregate principal
amount at any time not to exceed $30 million at any time outstanding (which
may include additional Indebtedness incurred pursuant to the Senior Credit
Facility);
(ix) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt; provided that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event will be deemed
to constitute an incurrence of Indebtedness by a Subsidiary of the Company;
and
(x) Indebtedness incurred by the Company or any of its Subsidiaries
that is a Subsidiary Guarantor arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from guarantees or letters of credit, surety bonds or performance bonds
securing the performance of the Company or any of its Subsidiaries in
connection with the disposition of a portion of the business or assets of a
Subsidiary of the Company in a principal amount not to exceed 25% of the
gross proceeds (with proceeds other than cash or Cash Equivalents being
valued at the fair market value thereof as determined by the Board of
Directors of the Company in good faith) actually received by the Company or
any of its Subsidiaries in connection with such disposition.
Notwithstanding any other provision of this covenant, a Guarantee of
Indebtedness permitted by the terms of the Indenture at the time such
Indebtedness was incurred will not constitute a separate incurrence of
Indebtedness.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens, unless the Obligations due under the Indenture and the
Notes are secured, on an equal and ratable basis (or on a senior basis, in the
case of Indebtedness subordinated in right of payment to the Notes), with the
Obligations so secured.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(A) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (B) pay any Indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (A) Existing Indebtedness, (B) the Senior Credit Facility
as in effect as of the Closing Date, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof; provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no less favorable to the Holders of the Notes with respect to
such dividend and other payment restrictions than those contained in the Senior
Credit Facility as in effect on the Closing Date, (C) the Indenture and the
Notes, (D) applicable law, (E) any instrument governing Acquired Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Subsidiaries as
in effect at the time of such acquisition (except to the extent such Acquired
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property and assets of the Person, so acquired; provided that the Consolidated
EBITDA of such Person is not taken into account in determining whether such
acquisition was permitted by the terms of the Indenture, (F) by reason of
customary provisions restricting assignments, subletting or other transfers
contained in leases, licenses and similar agreements entered into in the
ordinary course of business, (G) Purchase Money Obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in
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clause (iii) above on the property so acquired, (H) agreements relating to the
financing of the acquisition of real or tangible personal property acquired
after the Closing Date; provided that such encumbrance or restriction relates
only to the property which is acquired and in the case of any encumbrance or
restriction that constitutes a Lien, such Lien constitutes a Permitted Lien as
set forth in clause (xi) of the definition of "Permitted Lien,"(I) contracts
entered into in connection with any sale of assets permitted by the Indenture in
respect of the assets being sold pursuant to such contract, (J) Senior
Indebtedness permitted to be incurred under the Indenture and incurred after the
Closing Date; provided that such encumbrances or restrictions in such
Indebtedness are no less favorable to the Holders of the Notes than the
restrictions contained in the Senior Credit Facility on the Closing Date, (K)
Indebtedness of Subsidiaries that are not Subsidiary Guarantors incurred under
clause (x) of the covenant described under "-- Incurrence of Indebtedness and
Issuance of Preferred Stock," (L) Permitted Refinancing Indebtedness; provided
that the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no less favorable to the Holders of the Notes than
those contained in the agreements governing the Indebtedness being refinanced or
(M) an agreement in effect on the Closing Date and any amendment thereto;
provided that the restrictions contained in any such amendment are no less
favorable to the Holders of the Notes than the restrictions contained in such
agreements on the Closing Date.
Limitation on Layering Debt
The Indenture provides that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness and senior
in any respect in right of payment to the Notes. No Subsidiary Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to the Guarantor
Senior Indebtedness and senior in any respect in right of payment to the
Subsidiary Guarantees.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make any contract, agreement, understanding, loan, advance or guarantee with,
or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person, (ii) the Company delivers to the Trustee (A) with
respect to any Affiliate Transaction entered into after the Closing Date
involving aggregate consideration in excess of $500,000, a resolution of the
Board of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of the
Board of Directors and (B) with respect to any Affiliate Transaction involving
aggregate consideration in excess of $3 million, an opinion as to the fairness
to the Company or such Subsidiary of such Affiliate Transaction from a financial
point of view issued by an investment banking firm of national standing;
provided that this clause (ii) shall not apply to transactions under the
agreement dated on or before the Closing Date (the "Real Estate Agreement")
among one or more Affiliates of the Carmel Trust and the Company in accordance
with the terms of such Real Estate Agreement as in effect on the Closing Date
and any amendments, modifications, restatements, renewals or supplements
thereto; provided that any such amendment, modification, restatement, renewal or
supplement to the Real Estate Agreement contains provisions that are no less
favorable to the Holders of the Notes than those contained in the Real Estate
Agreement as in effect on the Closing Date and has been approved by a majority
of the disinterested members of the Board of Directors as evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee. In addition, the following will not be deemed to be
Affiliate Transactions: (1) the provision of administrative or management
services by the Company or any of its officers to any of its Subsidiaries in the
ordinary course of business, (2) any employment agreement, collective bargaining
agreement, employee benefit plan or any similar arrangement heretofore or
hereafter entered into by the Company or any of its Subsidiaries in the ordinary
course of business of the Company or such Subsidiary, (3) transactions between
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or among the Company and/or its Wholly Owned Subsidiaries, (4) transactions
permitted by the covenant described in "-- Restricted Payments," (5) payment of
reasonable and customary compensation to employees, officers, directors or
consultants in the ordinary course of business and (6) maintenance in the
ordinary course of business of benefit programs, or arrangements for employees,
officers or directors, including vacation plans, health and life insurance
plans, deferred compensation plans, and retirement or savings plans and similar
plans.
Additional Subsidiary Guarantees
The Indenture provides that all Subsidiaries of the Company substantially
all of whose assets are located in the United States or that conduct
substantially all of their business in the United States will be Subsidiary
Guarantors. In addition, the Indenture provides that the Company will not, and
will not permit any of the Subsidiary Guarantors to, make any Investment in any
Subsidiary that is not a Subsidiary Guarantor unless either (i) such Investment
is permitted by the covenant described under "-- Restricted Payments," or (ii)
such Subsidiary executes a Subsidiary Guarantee and delivers an opinion of
counsel in accordance with the provisions of the Indenture.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, at any time after
the Company files a registration statement with respect to the Exchange Offer,
the Company will file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such a
filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and the Subsidiary
Guarantors have agreed that, for so long as any Notes remain outstanding, they
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not, in a single transaction or
series of related transactions, consolidate or merge with or into (whether or
not the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another corporation, Person or
entity unless (i) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition will have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia, (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made assumes all the obligations of the Company under the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, (iii) immediately after such transaction no Default
or Event of Default exists and (iv) the Company or the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company), or
to which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning
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of the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock."
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture), (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the subordination provisions of
the Indenture) including, without limitation, payments of any required Change of
Control Payment or as a result of any Asset Sale Offer, (iii) failure by the
Company to comply for 30 days after notice with its other obligations described
under the captions "-- Change of Control" or "-- Asset Sales," or its
obligations under "-- Restricted Payments" or "-- Incurrence of Indebtedness and
Issuance of Preferred Stock," (iv) failure by the Company for 60 days after
notice to comply with any of its other agreements in the Indenture or the Notes,
(v) default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Significant Subsidiaries (or the payment
of which is Guaranteed by the Company or any of its Significant Subsidiaries)
whether such Indebtedness or Guarantee now exists, or is created after the
Closing Date, which default (A) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness after giving effect to any
grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (B) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $10 million or more, (vi) failure by the Company or
any of its Significant Subsidiaries to pay final judgments aggregating in excess
of $10 million, which judgments are not paid, discharged or stayed for a period
of 60 days, (vii) except as permitted by the Indenture, any Subsidiary Guarantee
by a Significant Subsidiary will be held in any judicial proceeding to be
unenforceable or invalid or will cease for any reason to be in full force and
effect or any Subsidiary Guarantor, or any Person acting on behalf of any
Subsidiary Guarantor, will deny or disaffirm its obligations under its
Subsidiary Guarantee if such Default continues for 10 days and (viii) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Significant Subsidiaries. A default under clauses (iii) and (iv) hereof will not
constitute an Event of Default until the Trustee or Holders of 25% in aggregate
principal amount of the then outstanding Notes notify the Company of the default
and the Company does not cure such default within the time specified in clauses
(iii) and (iv) hereof after receipt of such notice.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare the principal of, premium, if any, and accrued interest on the Notes to
be due and payable immediately. If any Senior Indebtedness is outstanding
pursuant to the Senior Credit Facility, upon a declaration of such acceleration,
such principal, premium, if any, and accrued interest on the Notes shall be due
and payable upon the earlier of (i) the day that is five Business Days after the
provision to the Company and the agent under the Senior Credit Facility of such
written notice, unless such Event of Default is cured or waived prior to such
date, and (ii) the date of acceleration of any Senior Indebtedness under the
Senior Credit Facility. Under certain circumstances, Holders of a majority in
aggregate principal amount of the then outstanding Notes may rescind any such
acceleration with respect to the Notes and its consequences. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company or any Significant
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
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The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee quarterly a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or direct or indirect
stockholder or Affiliate of the Company or any Subsidiary Guarantor (other than
the Company and any Subsidiary Guarantor), as such, will have any liability for
any obligations of the Company or any Subsidiary Guarantor under the Notes, the
Subsidiary Guarantees, the Indenture or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations will not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including nonpayment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes. In the event that the Company elects to
exercise Covenant Defeasance with respect to certain covenants, the remaining
covenants will remain in effect and an omission to comply with such remaining
covenants will continue to constitute an Event of Default.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date, (ii) in the case of Legal Defeasance, the
Company will have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the Closing Date, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel will confirm that, the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred, (iii) in the case of Covenant
Defeasance, the Company will have delivered to the Trustee an opinion of counsel
in the United States reasonably acceptable to the Trustee confirming that the
Holders of the outstanding Notes will not
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recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner at the same times as would have been the case if
such Covenant Defeasance had not occurred, (iv) no Default or Event of Default
will have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit, (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a Default under any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound, (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent relating to the Legal Defeasance or the Covenant Defeasance
have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing Default or Event of Default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change
the time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency,
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to provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's or the Subsidiary
Guarantors' obligations to Holders of Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default will
occur (which will not be cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes, unless such Holder will have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to CSK Auto, Inc., 645 E. Missouri Avenue, Phoenix,
Arizona 85012, Attention: Secretary.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the certificates representing the Notes will
initially be issued in the form of one or more permanent global Notes in
definitive, fully registered form without interest coupons (each a "Global
Note"). Upon issuance, each Global Note will be deposited with the Trustee as
custodian for, and registered in the name of, a nominee of The Depository Trust
Company ("DTC").
If a Holder tendering Old Notes so requests, such Holder's Notes will be
issued as described below under "-- Certificated Notes" in registered form
without coupons (the "Certificated Notes").
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or Holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or Holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture.
Payments of the principal of, premium, if any, and interest on a Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Company, the Trustee nor any Paying Agent will have
any responsibility or liability for any aspects of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
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The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest in respect of a Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by
a Holder of a Note only at the direction of one or more participants to whose
account the DTC interests in a Global Note is credited and only in respect of
such portion of the aggregate principal amount of a Note as to which such
participant or participants has or have given direction. However, if there is an
Event of Default under the Notes, DTC will exchange the applicable Global Note
for Certificated Notes, which it will distribute to its participants.
DTC has advised the Company that it is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and to facilitate the clearance and settlement of securities transactions
between participants through electronic book-entry changes in accounts of its
participants. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
Certificated Notes
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by DTC of its Global
Note, Certificated Notes will be issued to each person that DTC identifies as
the beneficial owner of the Notes represented by the Global Note. In addition,
any person having a beneficial interest in a Global Note or any holder of Old
Notes whose Old Notes have been accepted for exchange may, upon request to the
Trustee or the Exchange Agent, as the case may be, exchange such beneficial
interest or Old Notes for Certificated Notes. Upon any such issuance, the
Trustee is required to register such Certificated Notes in the name of such
person or persons (or the nominee of any thereof), and cause the same to be
delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any participant or indirect participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
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"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person and existing at the time
such asset is acquired.
"Additional Assets" means (i) any property or assets to be used by the
Company or a Subsidiary in a Related Business, (ii) the Capital Stock of a
Person that becomes a Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Subsidiary or (iii) Capital Stock constituting a
minority of interest in any Person that at such time is a Subsidiary; provided
that, in the case of clauses (ii) and (iii), such Subsidiary is engaged in a
Related Business.
"Affiliate" of any specified Person means (i) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person and (ii) any Person who is a director or
officer (A) of such Person, (B) of any Subsidiary of such Person or (C) of any
Person described in clause (i) above. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition
that does not constitute a Restricted Payment or an Investment by such Person of
any of its non-cash assets (including, without limitation, by way of a sale and
leaseback and including the issuance, sale or other transfer of any of the
Capital Stock of any Subsidiary of such Person (other than directors' qualifying
shares)) other than to the Company or to any of its Wholly Owned Subsidiaries
that is a Subsidiary Guarantor and (ii) the issuance of Equity Interests in any
Subsidiary or the sale of any Equity Interests of any Subsidiary (other than
directors' qualifying shares), in each case, in one or a series of related
transactions of or with respect to assets or Equity Interests that have a fair
market value of $1.5 million or more. Notwithstanding the foregoing, the term
"Asset Sale" shall not include: (A) the sale, lease, conveyance, disposition or
other transfer of all or substantially all of the assets of the Company, as
permitted pursuant to the covenant described under "Merger, Consolidation or
Sale of Assets," (B) the sale or lease of equipment, inventory, accounts
receivable or other assets in the ordinary course of business, (C) a transfer of
assets by the Company to a Wholly Owned Subsidiary that is a Subsidiary
Guarantor or by a Wholly Owned Subsidiary to the Company or to another Wholly
Owned Subsidiary that is a Subsidiary Guarantor or by a Wholly Owned Subsidiary
that is not a Subsidiary Guarantor to another Wholly Owned Subsidiary that is
not a Subsidiary Guarantor, (D) an issuance of Equity Interests by a Wholly
Owned Subsidiary to the Company or to another Wholly Owned Subsidiary that is a
Subsidiary Guarantor, or by a Wholly Owned Subsidiary that is not a Subsidiary
Guarantor to another Wholly Owned Subsidiary that is not a Subsidiary Guarantor,
(E) the surrender or waiver of contract rights or the settlement, release or
surrender of contract, tort or other claims of any kind, (F) the grant in the
ordinary course of business of any non-exclusive license of patents, trademarks,
registrations therefor and other similar intellectual property or (G) Permitted
Investments.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person, or any authorized committee of the Board of Directors
of such Person.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
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of corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person, but in each case excluding
any debt securities convertible into such stock, interests or other equivalents.
"Carmel Trust" means The Carmel Trust, a trust governed by the laws of
Canada, so long as the beneficiaries of such Trust are the named beneficiaries
of the Trust on the Closing Date or the beneficiaries that may be designated as
such pursuant to the terms of the agreement pursuant to which the Trust was
established, as such agreement is in effect as of the Closing Date.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States or any agency or instrumentality
thereof (provided that the full faith and credit of the United States is pledged
in support thereof) having maturities not more than twelve months from the date
of acquisition, (ii) U.S. dollar denominated (or foreign currency fully hedged)
time deposits, certificates of deposit, Eurodollar time deposits or Eurodollar
certificates of deposit of (A) any domestic commercial bank of recognized
standing having capital and surplus in excess of $500 million or (B) any bank
whose short-term commercial paper rating from S&P is at least A-1 or the
equivalent thereof or from Moody's is at least P-1 or the equivalent thereof
(any such bank being an "Approved Lender"), in each case with maturities of not
more than twelve months from the date of acquisition, (iii) commercial paper and
variable or fixed rate notes issued by any Approved Lender (or by the parent
company thereof) or any variable rate notes issued by, or guaranteed by, any
domestic corporation rated A-2 (or the equivalent thereof) or better by S&P or
P-2 (or the equivalent thereof) or better by Moody's and maturing within twelve
months of the date of acquisition, (iv) repurchase agreements with a bank or
trust company or recognized securities dealer having capital and surplus in
excess of $500 million for direct obligations issued by or fully guaranteed by
the United States on which the Company shall have a perfected first priority
security interest (subject to no other Liens) and having, on the date of
purchase thereof, a fair market value of at least 100% of the amount of
repurchase obligations and (v) interests in money market mutual funds which
invest solely in assets or securities of the type described in subparagraphs
(i), (ii), (iii) or (iv) hereof.
"Change of Control" means such time as (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act), other than the Initial
Control Group, is or becomes the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 35% of the total voting power of
the voting Capital Stock of the Company or Holdings, as the case may be;
provided that the Initial Control Group "beneficially owns" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the voting Capital
Stock of the Company or Holdings, as the case may be, than such other person and
does not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the board of directors of the
Company or Holdings, as the case may be (for purposes of this definition, such
other person shall be deemed to beneficially own any voting Capital Stock of a
specified corporation held by a parent corporation, if such other person
"beneficially owns" (as defined in this definition), directly or indirectly,
more than 35% of the voting power of the voting Capital Stock of such parent
corporation and the Initial Control Group "beneficially owns" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the voting power of the voting Capital Stock of
such parent corporation and does not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the board
of directors of such parent corporation) or (ii) any Person (other than the
Initial Control Group) (A) nominates one or more individuals for election to the
board of directors of the Company or Holdings, as the case may be, (B) solicits
proxies, authorizations or consents in connection therewith and (C) such number
of nominees of such Person elected to serve on the board of directors in such
election and all previous elections after the Closing Date and which are still
serving on such board of directors represents a majority of the board of
directors of the Company or Holdings, as the case may be, following such
election.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
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"Consolidated EBITDA" means, for any period, the sum, without duplication,
of (i) Consolidated Net Income of the Company for such period, plus (ii) Fixed
Charges of the Company for such period, plus (iii) provision for taxes based on
income or profits for such period (to the extent such income or profits were
included in computing such Consolidated Net Income for such period), plus (iv)
consolidated depreciation, amortization and other non-cash charges of the
Company and its Subsidiaries required to be reflected as expenses on the books
and records of the Company, plus (v) to the extent deducted in determining such
Consolidated Net Income for such period, expenses during such period consisting
of internal software development costs that are expensed by the Company but that
could have been capitalized during such period in accordance with GAAP and minus
(vi) cash payments with respect to any non-recurring, non-cash charges
previously added back pursuant to clause (iv); provided that Consolidated Net
Income shall exclude the impact of foreign currency translations.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges of,
a Subsidiary of a Person shall be added to Consolidated Net Income to compute
Consolidated EBITDA only to the extent (and in the same proportion) that the Net
Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockbrokers.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof, (ii) Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(which has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
(effected either through cumulative effect adjustment or a retroactive
application) shall be excluded, (v) the Net Income of, or any dividends or other
distributions from, any Unrestricted Subsidiary, to the extent otherwise
included, shall be excluded, except to the extent actually distributed to the
Company or one of its Subsidiaries, (vi) all other extraordinary gains and
extraordinary losses shall be excluded and (vii) any payments (net of tax
benefits related thereto) made by the Company under clauses (vii) (A) through
(F) of the second paragraph of clause (c) of the covenant described under
"Certain Covenants -- Restricted Payments," to the extent that such payments are
for items which are accounted for as expenses by Holdings (including, without
limitation, all payments of federal, state and local income taxes), shall be
included.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (A) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of going concern business made within 12 months after the acquisition of
such business) subsequent to the Closing Date in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (B) all
investment as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (C) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
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"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Depositary" means, with respect to the Notes issuable or issued in whole
or in part in global form, the Person specified in the Indenture as the
Depositary with respect to the Notes, until a successor shall have been
appointed and become such Depositary pursuant to the applicable provision of the
Indenture, and, thereafter, "Depositary" shall mean or include such successor.
"Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt
is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior
Indebtedness permitted under the Indenture the principal amount of which is $10
million or more and that has been designated by the Company in the instrument
governing such Senior Indebtedness as "Designated Senior Indebtedness."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an underwritten public offering of Equity Interests
of the Company other than Disqualified Stock pursuant to a registration
statement filed with the SEC in accordance with the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Senior Credit Facility) in
existence on the Closing Date, until such amounts are repaid.
"Existing Preferred Stock" means the 12% preferred stock of the Company
issued and outstanding on the Closing Date, and any extensions, refinancings,
renewals or replacements thereof (the "Refinancing Preferred Stock"); provided
that (i) the aggregate liquidation preference of such Refinancing Preferred
Stock does not exceed the aggregate liquidation preference of the Existing
Preferred Stock and (ii) the dividend rate per annum of such Refinancing
Preferred Stock does not exceed the dividend rate per annum of the Existing
Preferred Stock.
"Fixed Charges" means, for any period, the sum, without duplication, of (i)
the consolidated interest expense of the Company and its Subsidiaries for such
period, whether paid or accrued (including, without limitation, amortization or
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financing, and net payments (if any) pursuant to Hedging Obligations (but
excluding commitment fees and other periodic bank charges)), (ii) the
consolidated interest expense of the Company and its Subsidiaries that was
capitalized during such period, (iii) the interest expense on Indebtedness of
another Person that is Guaranteed by the Company or one of its Subsidiaries or
secured by a Lien on assets of the Company or one of its Subsidiaries (whether
or not such Guarantee or Lien is called upon) and (iv) the product of (A) all
cash dividend payments (and non-cash dividend payments in the case of a Person
that is a Subsidiary) on any series of preferred stock (other than the Existing
Preferred Stock) of such Person payable to a party other than the Company or a
Wholly Owned Subsidiary, times (B) a fraction, the numerator of which is one and
the denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, for any period, the ratio of (i)
Consolidated EBITDA to (ii) Fixed Charges, each determined for such period. In
the event that the Company or any of its Subsidiaries incurs, assumes,
Guarantees or redeems any Indebtedness (other than revolving credit borrowings)
or issues
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preferred stock subsequent to the commencement of the four-quarter reference
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), which Indebtedness or preferred
stock remains outstanding on the Calculation Date, then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, and to the discharge of any other Indebtedness or
preferred stock repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness or preferred stock, as if the same had
occurred at the beginning of the applicable four-quarter reference period. For
purposes of making the computation referred to above, (A) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period, (B) the Consolidated EBITDA attributable
to discontinued operations, as determined in accordance with GAAP, and
operations or businesses disposed of prior to the Calculation Date, shall be
excluded and (C) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or business disposed of prior
to the Calculation Date, shall be excluded, but only to the extent that the
obligations giving rise to such Fixed Charges will not be obligations of the
Company or any of its Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles, as in effect from
time to time, set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as have been approved by a
significant segment of the accounting profession. All ratios and computations
based on GAAP contained in the Indenture shall be computed in conformity with
GAAP as in effect on the Closing Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States of America is
pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor Senior Indebtedness" means (i) any Guarantees by the Subsidiary
Guarantors of the Senior Bank Debt and (ii) any other Indebtedness permitted to
be incurred by the Subsidiary Guarantors under the terms of the Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to the
Subsidiary Guarantees. Notwithstanding anything to the contrary in the
foregoing, Guarantor Senior Indebtedness will not include (A) any liability for
federal, state, local, or other taxes owed or owing by the Subsidiary
Guarantors, (B) any Indebtedness of the Subsidiary Guarantors to any of their
Subsidiaries or other Affiliates, (C) any trade payables or (D) any Indebtedness
that is incurred in violation of the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Holdings Notes" means the 12% senior subordinated notes of Holdings due
2008, issued pursuant to (i) an indenture dated on or about the Closing Date,
between Holdings and AIBC Services, N.V., as trustee, and (ii) an indenture
dated on or about the Closing Date, between Holdings and Transatlantic Finance,
Ltd., as trustee, as the same may be refinanced, extended or renewed from time
to time without increasing the principal amount thereof or interest rate with
respect thereto.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or
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letters of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person.
"Initial Control Group" means (i) Investcorp, (ii) members of the
Management Group, (iii) any Person to the extent acting in the capacity of an
underwriter in connection with a public or private offering of the Company's or
Holding's Capital Stock and (iv) any Affiliate of Investcorp.
"Investcorp" means INVESTCORP S.A., a Luxembourg corporation.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or indirect
loans including Guarantees and other Indebtedness, advances or capital
contributions (excluding commission, payroll, travel, loans and similar advances
to officers and employees, accounts receivable and bank demand deposits, in each
case made or arising in the ordinary course of business), transfers of assets
outside the ordinary course of business (other than Asset Sales), purchases,
redemptions or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities issued by any other Person (including, without
limitation, any Indebtedness, Equity Interest or other securities of the direct
or indirect parent of the Company or other Affiliate of the Company) and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that an acquisition of assets, Equity
Interests or other securities by the Company for consideration consisting of
common equity securities of the Company shall not be deemed to be an Investment.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Management Group" means any Officer of the Company or Holdings.
"Net Income" means for any period with respect to any Person, the net
income (loss) of such Person for such period, determined in accordance with GAAP
and before any reduction in respect of preferred stock dividends, plus, in each
case, to the extent deducted in determining net income for such period, any
expenses incurred in connection with the Acquisition and any payments made under
the equity participation program resulting from the Acquisition, excluding,
however, (i) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with (A) any Asset
Sale (including, without limitation, dispositions pursuant to sale and leaseback
transactions) or (B) the disposition of any securities by such Person or any of
its Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not
loss), together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale and any cash payments received by way
of deferred payment of principal pursuant to a note or installment receivable or
otherwise, but only as and when received, and excluding any other consideration
received in the form of assumption by the acquiring person of
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Indebtedness or other obligations relating to the assets that are the subject of
such Asset Sale or received in any other non-cash form), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, title and recording tax expenses and other fees and
expenses incurred and sales commissions) and any relocation expenses incurred as
a result thereof, all Federal, state, local and foreign taxes paid or payable as
a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), all payments made on any
Indebtedness that is secured by any assets subject to such Asset Sale, in
accordance with the terms of any Lien upon such assets, or that must by its
terms, or in order to obtain a necessary consent to such Asset Sale, or by
application of law be repaid out of the proceeds from such Asset Sale, all
distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Sale and any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Subsidiaries (A) provides credit support of any kind (including
any undertaking, agreement or instrument that would constitute Indebtedness),
(B) is directly or indirectly liable (as a guarantor or otherwise), or (C)
constitutes the lender, (ii) no default with respect to which (including any
rights that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness of the Company or any of its Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity, and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Subsidiaries.
"Obligations" means, with respect to any Indebtedness, any principal,
interest, penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing such Indebtedness.
"Officer" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the
Secretary or any Vice-President of such Person.
"Permitted Investments" means (i) any Investments in the Company or in a
Subsidiary of the Company that is a Subsidiary Guarantor and that is engaged in
a Related Business, (ii) any Investment in Cash Equivalents, (iii) Investments
by the Company or any Subsidiary of the Company in a Person if as a result of
such Investment (A) such Person becomes a Subsidiary of the Company that is
engaged in a Related Business or (B) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Subsidiary of the Company
that is a Subsidiary Guarantor and that is engaged in a Related Business, (iv)
Investments made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described under "-- Asset Sales," (v) Investments outstanding as of the Closing
Date, (vi) Investments in the form of promissory notes of members of the
Company's or Holdings' management in consideration of the purchase by such
members of Equity Interests (other than Disqualified Stock) in the Company or
Holdings; provided that such Investments made under this clause (vi) do not
exceed $8 million at any time outstanding, (vii) Investments which constitute
Indebtedness permitted by the covenant described under "Incurrence of
Indebtedness and Issuance of Preferred Stock," (viii) stock, obligations or
securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Subsidiary or in satisfaction of
judgments and (ix) other Investments in any Person that do not exceed $5 million
at any time outstanding.
"Permitted Liens" means (i) Liens securing Senior Indebtedness in an
aggregate principal amount at any time outstanding not to exceed amounts
permitted under the covenant described under "-- Incurrence of Indebtedness and
Issuance of Preferred Stock," (ii) Liens in favor of the Company, (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company, (iv) Liens on property existing at
the time of acquisition thereof by the Company or any
92
94
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such acquisition, (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business, (vi)
Liens existing on the Closing Date, (vii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor,
(viii) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business in
respect of obligations that are not yet due or that are bonded or that are being
contested in good faith and by appropriate proceedings if adequate reserves with
respect thereto are maintained on the books of the Company or such Subsidiary,
as the case may be, in accordance with GAAP, (ix) Liens incurred or deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security, (x)
easements, rights-of-way, restrictions, minor defects or irregularities in title
and other similar charges or encumbrances not interfering in any material
respect with the business of the Company or any of its Subsidiaries, (xi)
Purchase Money Liens (including extensions and renewals thereof), (xii) Liens
securing reimbursement obligations with respect to letters of credit which
encumber only documents and other property relating to such letters of credit
and the products and proceeds thereof, (xiii) judgment and attachment Liens not
giving rise to an Event of Default, (xiv) Liens encumbering deposits made to
secure obligations arising from statutory, regulatory, contractual or warranty
requirements, (xv) Liens arising out of consignment or similar arrangements for
the sale of goods, (xvi) any interest or title of a lessor in property subject
to any capital lease obligation or operating lease, (xvii) Liens arising from
filing Uniform Commercial Code financing statements regarding leases, (xviii)
leases or subleases to third parties, (xix) Liens on assets of Subsidiaries with
respect to Acquired Indebtedness and (xx) any condemnation or eminent domain
proceedings affecting any real property.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that: (i) the
principal amount of such Permitted Refinancing Indebtedness does not exceed the
principal amount of the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of reasonable expenses incurred in
connection therewith), (ii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is pari passu or subordinated in right
of payment to the Notes, such Permitted Refinancing Indebtedness has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded, (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded and (iv) such Indebtedness
is incurred either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or agency or political subdivision
thereof (including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"Purchase Money Lien" means a Lien granted on an asset or property to
secure a Purchase Money Obligation permitted to be incurred under the Indenture
and incurred solely to finance the acquisition of such asset or property;
provided that such Lien encumbers only such asset or property and is granted
within 180 days of such acquisition.
"Purchase Money Obligations" of any Person means any obligations of such
Person to any seller or any other Person incurred or assumed to finance the
acquisition of real or personal property to be used in the business of such
Person or any of its Subsidiaries in an amount that is not more than 100% of the
cost of such
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property, and incurred within 180 days after the date of such acquisition
(excluding accounts payable to trade creditors incurred in the ordinary course
of business).
"Related Business" means those businesses in which the Company or any of
its Subsidiaries are engaged on the Closing Date, any businesses incidental
thereto and any reasonable extensions or expansions thereof.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Bank Debt" means the Indebtedness outstanding under the Senior
Credit Facility as such agreement may be restated, further amended, supplemented
or otherwise modified, waived or replaced from time to time hereafter, together
with any refunding or replacement of such Indebtedness.
"Senior Credit Facility" means the Senior Credit Facility dated on or about
the Closing Date among the Company, the lenders referred to therein and The
Chase Manhattan Bank, as administrative agent, including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith and in each case as amended, modified, waived, renewed,
refunded, replaced or refinanced from time to time.
"Senior Indebtedness" means (i) the Senior Bank Debt and (ii) any other
Indebtedness permitted to be incurred by the Company under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Notes. Notwithstanding anything to the contrary in the foregoing,
Senior Indebtedness shall not include (A) any liability for federal, state,
local or other taxes owed or owing by the Company, (B) any Indebtedness of the
Company to any of its Subsidiaries or other Affiliates, (C) any trade payables
or (D) any Indebtedness that is incurred in violation of the Indenture.
"Senior Revolving Debt" means revolving credit borrowings and letters of
credit under the Senior Credit Facility and/or any successor facility or
facilities.
"Senior Term Debt" means term loans under the Senior Credit Facility and/or
any successor facility or facilities.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof;
provided that "Significant Subsidiary" shall include any two or more
Subsidiaries which, if considered as a whole, would constitute a Significant
Subsidiary.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof). Unrestricted Subsidiaries shall not
be included in the definition of Subsidiary for any purposes of the Indenture
(except, as the context may otherwise require, for purposes of the definition of
"Unrestricted Subsidiary").
"Subsidiary Guarantees" means each of the Guarantees of the Company's
obligations under the Notes and related obligations entered into by a Subsidiary
Guarantor.
"Subsidiary Guarantors" means each Subsidiary that executes a Subsidiary
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (A) has no Indebtedness other than
Non-Recourse Debt, (B) is not party to any agreement, contract, arrangement or
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96
understanding with the Company or any Subsidiary of the Company unless the terms
of any such agreement, contract, arrangement or understanding are no less
favorable to the Company or such Subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of the Company, (C) is a Person
with respect to which neither the Company nor any of its Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results and (D) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Subsidiaries. Any such designation by
the Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted under the Indenture.
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Subsidiary of the Company as
of such date (and, if such Indebtedness is not permitted to be incurred as of
such date under the Indenture, the Company shall be in Default under the
Indenture). The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Subsidiary of the Company of
any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the Indenture, and (ii) no Default or Event of Default would be in existence
following such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (A) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (B) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person. Unrestricted
Subsidiaries shall not be included in the definition of Wholly Owned Subsidiary
for any purposes of the Indenture (except, as the context may otherwise require,
for purposes of the definition of "Unrestricted Subsidiary.")
95
97
PLAN OF DISTRIBUTION
Each broker-dealer that receives Notes for its own account pursuant to the
Exchange Offer (a "Participating Broker") must acknowledge that it will deliver
a prospectus in connection with any resale of such Notes. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker in connection with any resale of Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. The Company has agreed that for a period of one year
from the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any Participating Broker for use in connection with
any such resale. In addition, until August 11, 1997 (90 days from the date of
this Prospectus), all dealers effecting transactions in the Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Notes by
broker-dealers. Notes received by any Participating Broker may be sold from time
to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such Notes.
Any Participating Broker that resells Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver, and
by delivering, a prospectus as required, a Participating Broker will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of one year from the Expiration Date, the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker that requests such
documents in the Letter of Transmittal. The Company will pay all the expenses
incident to the Exchange Offer (which shall not include the expenses of any
Holder in connection with resales of the Notes). The Company has agreed to
indemnify Holders of the Notes, including any Participating Broker, against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby and the Subsidiary Guarantees will
be passed upon by Gibson, Dunn & Crutcher LLP and, as to certain matters
governed by the laws of the State of Arizona, by Bryan Cave LLP and, as to
certain matters governed by the laws of the State of Washington, by Ryan,
Swanson & Cleveland, PLLC.
EXPERTS
The consolidated balance sheet of the Company as of February 2, 1997 and
the related consolidated statements of operations, stockholder's equity and cash
flows for the year then ended included in this Prospectus have been so included
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing.
The consolidated balance sheet of the Company as of January 28, 1996 and
the related consolidated statements of operations, stockholder's equity and cash
flows for each of the two years in the period ended January 28, 1996 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing.
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98
CHANGE IN ACCOUNTANTS
The consolidated balance sheet of the Company as of January 28, 1996 and
the related consolidated statements of operations, stockholder's equity and cash
flows for each of the two years in the period ended January 28, 1996 were
audited by Price Waterhouse LLP. The financial statements for the year ended
February 2, 1997 were audited by Coopers & Lybrand L.L.P., which was first
engaged effective December 5, 1996. Upon the completion of the Acquisition and
Financings, and with the approval of the Board of Directors, Price Waterhouse
LLP was dismissed by management as the Company's independent accountants.
The reports of Price Waterhouse LLP with respect to the financial
statements of the Company for each of the two fiscal years in the period ended
January 28, 1996 did not contain any adverse opinion or disclaimer of opinion,
and were not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with its audits for each of the two fiscal years in
the period ended January 28, 1996 and through December 5, 1996 there were no
disagreements between the Company and Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of
Price Waterhouse LLP, would have caused it to make reference to the subject
matter thereof in connection with its reports on the financial statements for
such years.
97
99
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Financial Statements
Report of Independent Accountants................................................... F-2
Report of Independent Accountants................................................... F-3
Consolidated Statements of Operations............................................... F-4
Consolidated Balance Sheets......................................................... F-5
Consolidated Statements of Stockholder's Equity..................................... F-6
Consolidated Statements of Cash Flows............................................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
F-1
100
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
CSK Auto, Inc. (a wholly-owned subsidiary of CSK Group, Ltd.)
We have audited the accompanying consolidated balance sheet of CSK Auto,
Inc. and subsidiaries (the "Company") as of February 2, 1997, and the related
consolidated statement of operations, stockholder's equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CSK Auto, Inc.
and subsidiaries at February 2, 1997 and the consolidated results of operations
and cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Phoenix, AZ
April 22, 1997
F-2
101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
CSK Auto, Inc. (a wholly-owned subsidiary of CSK Group, Ltd.)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholder's equity
present fairly, in all material respects, the financial position of CSK Auto,
Inc. (a wholly-owned subsidiary of CSK Group, Ltd.) and its subsidiaries at
January 28, 1996, and the results of their operations and their cash flows for
each of the two years in the period ended January 28, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our 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.
PRICE WATERHOUSE LLP
Phoenix, AZ
May 21, 1996
F-3
102
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED
----------------------------------------------------------
JANUARY 29, 1995 JANUARY 28, 1996 FEBRUARY 2, 1997
---------------- ---------------- ----------------
Net Sales...................................... $688,135 $718,352 $793,092
Cost and expenses:
Cost of sales................................ 410,358 433,817 463,374
Operating and administrative................. 255,922 281,387 298,004
Store closing costs.......................... 2,678 3,310 14,904
Acquisition charge -- equity participation
agreements................................ -- -- 20,174
-------- -------- --------
668,958 718,514 796,456
Operating profit (loss)........................ 19,177 (162) (3,364)
Other Acquisition and Financings fees.......... -- -- 12,463
Interest expense............................... 10,343 14,379 19,025
-------- -------- --------
Income (loss) before income taxes and
extraordinary gain........................... 8,834 (14,541) (34,852)
Income tax expense (benefit)................... 796 (5,447) (11,318)
-------- -------- --------
Income (loss) before extraordinary gain........ 8,038 (9,094) (23,534)
Extraordinary gain on the elimination of debt,
net of income taxes.......................... 97,186 -- --
-------- -------- --------
Net income (loss).............................. $105,224 $ (9,094) $(23,534)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
103
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JANUARY 28, FEBRUARY 2,
1996 1997
----------- -----------
Cash and cash equivalents............................................. $ 4,364 $ 5,223
Receivables, net of allowances of $1,953 and $1,768, respectively..... 25,448 28,511
Inventories........................................................... 248,964 268,214
Assets held for sale.................................................. 1,203 5,971
Prepaid expenses and other assets..................................... 4,823 10,139
-------- --------
Total current assets........................................ 284,802 318,058
Property and equipment, net........................................... 80,018 71,363
Leasehold interests, net.............................................. 14,500 12,683
Deferred income taxes................................................. 9,219 18,089
Other assets, net..................................................... 2,780 19,350
-------- --------
Total assets................................................ $ 391,319 $ 439,543
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Accounts payable...................................................... $ 153,709 $ 128,002
Accrued payroll and related expenses.................................. 13,503 15,851
Accrued expenses and other current liabilities........................ 21,479 44,444
Due to affiliates..................................................... 5,530 --
Current maturities of amounts due under credit agreement.............. 1,000 1,000
Current maturities of capital lease obligations....................... 5,488 7,007
Deferred income taxes................................................. 3,045 597
-------- --------
Total current liabilities................................... 203,754 196,901
-------- --------
Amounts due under credit agreement.................................... 95,062 137,000
Obligations under senior notes........................................ -- 125,000
Obligations under capital leases...................................... 20,453 15,673
Due to affiliates..................................................... -- 1,000
Other................................................................. 12,053 20,675
-------- --------
Total non-current liabilities............................... 127,568 299,348
-------- --------
Commitments and contingencies
Stockholder's equity (deficit):
Redeemable preferred stock, $.01 par value, 206,500 shares
authorized, 50,000 shares issued and outstanding, liquidation
preference redeemable at $1,000 per share, 12% cumulative
dividend......................................................... -- 1
Common stock, $.01 par value, 20,000 shares authorized, 2,000 shares
issued and outstanding........................................... 1 1
Additional paid-in capital.......................................... 87,122 1,501
Stockholder receivable.............................................. -- (5,966)
Accumulated deficit................................................. (27,126) (52,243)
-------- --------
Total stockholder's equity (deficit)........................ 59,997 (56,706)
-------- --------
Total liabilities and stockholder's equity (deficit)........ $ 391,319 $ 439,543
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
104
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ---------------- PAID-IN ACCUMULATED STOCKHOLDER TOTAL EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE (DEFICIT)
------ ------ ------ ------ ---------- ----------- ----------- ------------
Balance at January 30, 1994.... -- $ -- 2,000 $ 1 $ 81,679 $(123,256) $ -- $ (41,576)
Income benefit from tax
agreement.................... -- -- -- -- 728 -- -- 728
Net income..................... -- -- -- -- -- 105,224 -- 105,224
------ --- ----- --- --------- --------- ------- ---------
Balance at January 28, 1995.... -- -- 2,000 1 82,407 (18,032) -- 64,376
Contribution from Holdings..... -- -- -- -- 4,715 -- -- 4,715
Net loss....................... -- -- -- -- -- (9,094) -- (9,094)
------ --- ----- --- --------- --------- ------- ---------
Balance at January 28, 1996.... -- -- 2,000 1 87,122 (27,126) -- 59,997
Redeemable preferred shares
issued....................... 50,000 1 -- -- 45,999 -- -- 46,000
Stockholder receivable......... -- -- -- -- 5,966 -- (5,966) --
Dividend to affiliate.......... -- -- -- -- (238,468) -- -- (238,468)
Contribution from Holdings..... -- -- -- -- 100,882 -- -- 100,882
Net loss....................... -- -- -- -- -- (23,534) -- (23,534)
Accrual of dividend on
preferred stock.............. -- -- -- -- -- (1,583) -- (1,583)
------ --- ----- --- --------- --------- ------- ---------
Balance at February 2, 1997.... 50,000 $ 1 2,000 $ 1 $ 1,501 $ (52,243) $ (5,966) $ (56,706)
====== === ===== === ========= ========= ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
105
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
------------------------------------------------------
JANUARY 29, 1995 JANUARY 28, 1996 FEBRUARY 2, 1997
---------------- ---------------- ----------------
Cash flows provided by (used in) operating
activities:
Net income (loss).............................. $105,224 $ (9,094) $ (23,534)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization of property
and equipment............................. 10,961 14,343 17,290
Amortization and write-off of leasehold
interests................................. 1,992 1,647 1,749
Amortization of deferred financing costs.... 359 737 1,421
Amortization of other deferred charges...... 152 271 186
Deferred interest on previous credit
agreement................................. 1,662 -- --
Extraordinary gain on elimination of debt... (97,186) -- --
Deferred income taxes....................... (195) (5,448) (11,318)
Change in operating assets and liabilities:
Accounts receivable....................... (5,063) (11,772) (3,063)
Inventories............................... (34,010) (23,081) (19,250)
Prepaid expenses and other current
assets................................. 113 542 (5,316)
Accounts payable.......................... 33,209 22,631 (25,707)
Accrued payroll, accrued expenses and
other current liabilities.............. (3,821) (496) 16,993
Due to affiliate.......................... -- 5,530 (4,530)
Store closing costs....................... (618) (447) 10,544
Other..................................... 2,341 1,276 6,169
-------- --------- ---------
Net cash provided by (used in) operating
activities................................ 15,120 (3,361) (38,366)
-------- --------- ---------
Cash flows used in investing activities:
Capital expenditures........................ (14,597) (11,640) (6,317)
Expenditures for assets held for sale....... (6,038) (24,203) (19,023)
Proceeds from sale of property and equipment
and assets held for sale.................. 1,758 28,257 14,667
Other investing activities.................. (106) (302) (13)
-------- --------- ---------
Net cash used in investing activities....... (18,983) (7,888) (10,686)
-------- --------- ---------
Cash flows provided by (used in) financing
activities:
Borrowings under Senior Credit Agreement.... -- 809,663 805,242
Payments of debt............................ (2,362) (795,807) (763,304)
Borrowings under Senior Notes............... -- -- 125,000
Issuance of preferred stock................. -- -- 46,000
Payments on capital lease obligations....... (2,954) (4,976) (5,888)
Dividends paid to affiliate................. -- -- (238,468)
Contributions from Holdings................. -- 4,715 100,882
Note issuance costs......................... -- -- (18,632)
Other....................................... (67) (852) (921)
-------- --------- ---------
Net cash provided by (used in) financing
activities..................................... (5,383) 12,743 49,911
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... (9,246) 1,494 859
Cash and cash equivalents, beginning of period... 12,116 2,870 4,364
-------- --------- ---------
Cash and cash equivalents, end of period......... $ 2,870 $ 4,364 $ 5,223
======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
106
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CSK Auto, Inc., formerly known as Northern Automotive Corporation (the
"Company"), is a specialty retailer of automotive aftermarket parts and
accessories. At February 2, 1997, the Company operated 580 stores in 14 Western
states. The Company operates as a fully integrated chain under three tradenames,
each of which at one time represented a separate retail chain: Checker Auto
Parts was founded in 1968 and operates in the Southwest and Rocky Mountain
States; Schuck's Auto Supply was founded in 1917 and operates in the Pacific
Northwest; and Kragen Auto Parts was founded in 1947 and operates primarily in
California. In December 1986, the Checker Auto Parts and Kragen Auto Parts
chains were acquired from Lucky Stores and merged in 1987 with Schuck's Auto
Supply to form the Company. The Company is a wholly-owned subsidiary of CSK
Group, Ltd. ("Holdings").
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries Schuck's Distribution Company and Kragen Auto
Supply Company. All intercompany accounts and transactions are eliminated in
consolidation.
Fiscal Year
The Company's fiscal year-end is the Sunday closest to January 31. The
years ended January 29, 1995 (fiscal "1994") and January 28, 1996 (fiscal
"1995") consist of 52 weeks. The year ended February 2, 1997 (fiscal "1996")
consists of 53 weeks.
Cash Equivalents
Cash equivalents consist primarily of certificates of deposit with
maturities of three months or less when purchased.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and trade receivables. As of February 2, 1997, the Company had cash and cash
equivalents on deposit with a major financial institution which were in excess
of FDIC insured limits. Historically, the Company has not experienced any losses
of its cash and cash equivalents due to such concentration of credit risk.
The Company does not hold collateral to secure payment of its trade
accounts receivable. However, management performs on-going credit evaluations of
its customers' financial condition and provides an allowance for estimated
potential losses. Exposure to credit loss is limited to the carrying amount.
Accounts Receivable
Accounts receivable is primarily comprised of amounts due from vendors for
rebates or allowances and from commercial sales customers.
Inventories and Cost of Sales
Inventories are valued at the lower of cost or market, cost being
determined utilizing the last-in, first-out method. Cost of sales includes
product cost net of earned vendor rebates, discounts and allowances. The Company
recognizes vendor rebates, discounts and allowances based on the terms of the
underlying agreements. Such amounts may be recognized immediately, amortized
over the life of the applicable agreements, or recognized as inventory is sold.
Certain operating and administrative costs are capitalized in
F-8
107
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
inventories. The amounts of capitalized operating and administrative costs
included in inventory as of January 28, 1996 and February 2, 1997 were
approximately $8.5 million and $9.7 million, respectively. The replacement cost
of inventories approximated $211.0 million at January 28, 1996 and $225.6
million at February 2, 1997.
Property and Equipment
Property, equipment and purchased software are recorded at cost.
Depreciation and amortization are computed for financial reporting purposes
utilizing primarily the straight line method over the estimated useful lives of
the related assets which range from 5 to 25 years, or for leasehold improvements
and property under capital lease, the base lease term or estimated useful life,
if shorter. Maintenance and repairs are charged to earnings when incurred.
Store Preopening Costs
Store preopening costs, consisting primarily of incremental labor, supplies
and occupancy costs directly related to the opening of specific stores, are
capitalized as prepaid expenses and other current assets and expensed during the
month in which the store is opened.
Internal Software Development Costs
Internal software development costs, consisting primarily of incremental
internal labor costs and benefits, are expensed as incurred. Total amounts
charged to operations for 1994, 1995 and 1996 were approximately $3.0 million,
$6.2 million and $1.5 million, respectively.
Leasehold Interests
Leasehold interests represent the discounted net present value of the
excess of the fair rental value over the respective contractual rent of
facilities under operating leases acquired in business combinations.
Amortization expense is computed on a straight-line basis over the respective
lease terms. Accumulated amortization totaled $16.2 million and $16.3 million at
January 28, 1996 and February 2, 1997, respectively.
Store Closing Costs
The company provides an allowance for estimated costs and losses to be
incurred in connection with store closures and losses on the disposal of
store-related assets, which is net of anticipated sublease income. See Note 12.
Advertising
The Company expenses all advertising costs as such costs are incurred.
Amounts due under vendor cooperative advertising agreements are recorded as
receivables until their collection. Advertising expense for fiscal years 1994,
1995 and 1996 totaled approximately $24.7 million, $19.8 million and $21.8
million, respectively.
Assets Held for Sale
Assets held for sale consist of newly acquired land, buildings and store
fixtures owned by the Company which the Company intends in the next twelve
months to sell to and lease back from third parties under operating lease
arrangements.
F-9
108
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Long-lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
("SFAS 121"), issued in March 1995 and effective for fiscal years beginning
after December 15, 1995, requires recognition of impairment losses whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. During fiscal 1996, the Company adopted this statement
and determined that no impairment loss need be recognized for applicable assets
of continuing operations.
Income Taxes
At the beginning of the fiscal year ended January 30, 1994, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," on a prospective basis. The adoption did not have
a material impact on the Company. This standard requires that the Company
compute its federal income tax expense as if it were a separate taxpayer,
irrespective of the provisions of the existing Tax Agreement (as defined in Note
11).
SFAS 109 provides that deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities ("temporary differences") and their financial reporting amounts at
each year end based on enacted tax laws and statutory rates applicable to the
period in which the temporary differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations thereof. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. See Note 9.
Earnings Per Share
Historical earnings per share have not been presented due to the fact that
the information is not considered meaningful as a result of the Acquisition
described in Note 2.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-10
109
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Reclassifications
Certain prior year financial statement amounts have been reclassified to
conform to the current year presentation.
NOTE 2 -- ACQUISITION AND FINANCINGS
Through a series of transactions, on October 30, 1996, certain affiliates
of INVESTCORP S.A. ("Investcorp") and certain other investors (collectively with
Investcorp, the "Initial Investcorp Group") acquired (the "Acquisition") from
the Carmel Trust ("Carmel"), a trust governed by the laws of Canada, a 51%
common equity interest in Holdings for $105.0 million. A corporation in which an
affiliate of Investcorp holds a minority interest also purchased $40.0 million
aggregate principal amount of 12% senior subordinated notes of Holdings (the
"Holdings Notes"). Holdings in turn purchased $40.0 million of preferred stock
of the Company. The Company then borrowed $100.0 million under its senior credit
facility, which, together with the proceeds from an offering of $125.0 million
aggregate principal amount of senior subordinated notes (the "Old Notes") and
the sale of $40.0 million of Holdings Notes, was, following a dividend to
Holdings by the Company, used to redeem the stock of Holdings held by Carmel for
$238.5 million. Carmel then purchased from Holdings for $100.9 million a 49%
common equity interest in Holdings and an affiliate of Carmel purchased $10.0
million aggregate principal amount of Holdings Notes. Holdings in turn purchased
$10.0 million in preferred stock of the Company. The Company then repaid amounts
outstanding under its then existing credit agreement, which was terminated and
incurred certain expenses totaling $32.6 million related to the foregoing which
are discussed more fully below. Following the transactions, the Initial
Investcorp Group owned a 51% common equity interest in Holdings, a corporation
in which an affiliate of Investcorp holds a minority interest owned $40.0
million aggregate principal amount of Holdings Notes, Carmel owned a 49% common
equity interest in Holdings and an affiliate of Carmel owned $10.0 million
aggregate principal amount of Holdings Notes. Holdings owns 100% of the common
equity and $50.0 million of preferred stock of the Company. The preferred stock
has a liquidation preference of $1,000 per share and pays cumulative dividends
at 12% per annum.
In connection with the Acquisition, the Company changed its name from
Northern Automotive Corporation to CSK Auto, Inc. and became a direct
wholly-owned subsidiary of Holdings. Following the Acquisition, the only
outstanding capital stock of the Company is the common stock and preferred stock
described above, all of which is held by Holdings. Prior to the Acquisition, the
Company had both common stock and preferred stock issued and outstanding which
was effectively owned by Holdings. The common stock was redeemed and the
preferred stock of the Company was canceled in conjunction with the Acquisition.
The accompanying financial statements have been retroactively restated to give
effect to the foregoing, as the presentation of the historical capitalization is
not considered meaningful as a result of the Acquisition.
All of the Company's subsidiaries have fully and unconditionally guaranteed
the Old Notes on a joint and several basis. The subsidiaries do not have any
material assets or liabilities or conduct any material operations. As management
believes that separate financial information regarding there subsidiaries is
immaterial and that the guarantees do not enhance the likelihood that the
interest on or principal of the Old Notes will be paid, no separate financial
information regarding the Company's subsidiaries has been presented herein.
Prior to the Acquisition, the Company had entered into incentive
compensation agreements with certain of its executives pursuant to which they
would be compensated in a sale of the Company's equity securities as if they
owned specified percentages of the Company's outstanding common stock. Pursuant
to these agreements, one former and six current executive officers are entitled
to certain payments in connection with the Acquisition based upon the
consideration they would have been entitled to if they had owned an aggregate
F-11
110
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- ACQUISITION AND FINANCINGS -- CONTINUED
of 6.4% of the Company's common stock and had sold all of such common stock in
connection with the Acquisition at the price per share paid for such shares in
the Acquisition. In satisfaction of all Company obligations under the
agreements, upon closing of the Acquisition the Company recorded a charge of
approximately $20.2 million to provide for such incentive compensation and
related payroll taxes thereon and such individuals received payments in the
aggregate amount of $9.9 million. A second payment of equal amount is due on
October 30, 1997 to each such individual unless such individual terminates his
employment with the Company prior to such date. Carmel, which owns a 49% common
equity interest in Holdings following the Acquisition, will reimburse the
Company for 60% (the estimated after-tax cost to the Company) of the amount of
such latter payments made one year from the closing of the Acquisition. Such
estimated reimbursement has been recorded herein as "Stockholder Receivable" and
as "Additional Paid-in Capital".
In addition, the Company incurred legal, accounting, consulting, bridge
loan commitment and other Acquisition fees and expenses of approximately $12.5
million.
The sources and uses of cash in the Acquisition and Financings which
transpired on October 30, 1996 were as follows (in thousands):
SOURCES OF CASH
Issuance of 11% Senior Subordinated Notes......................... $125,000
Senior Credit Facility -- Term Loan............................... 100,000
Issuance of Preferred Stock....................................... 46,000
Capital Contribution from Holdings................................ 100,882
--------
$371,882
========
USES OF CASH
Dividend to affiliate............................................. $238,468
Payment to management under Equity Participation Plan............. 9,976
Retirement of 1995 Credit Agreement............................... 93,072
Payments for debt issue costs..................................... 18,632
Payment of payroll taxes on payments to management................ 145
Payments for advisory and financing fees.......................... 10,542
Increase in working capital....................................... 1,048
--------
$371,882
========
NOTE 3 -- TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES
The Company provided Auto Works Holdings, Inc. ("Auto Works"), a former
affiliate of the Company, with management and other support services. The
Company had a receivable from Auto Works for $11.4 million as of February 2,
1992, for services provided through that date, which was converted into a non-
interest bearing obligation maturing in fifteen years (or sooner under certain
conditions). During the year ended January 30, 1994 the Company received
approximately $1.3 million, which was recorded as a reduction of operating and
administrative expenses, for services provided to Auto Works. Effective November
27, 1993, Auto Works was sold to an independent third party. Subsequent thereto,
and pursuant to the stock purchase agreement between Holdings and the third
party, Holdings assumed the $11.4 million obligation of Auto Works to the
Company which was outstanding on November 27, 1993. In the years ended January
30, 1994 and January 28, 1996, the Company received payments on the obligation
of $3.7 million and $4.7 million, respectively. The payments were reflected as
contributions from Holdings. The entire assumed balance of the receivable was
not recorded as a contribution in 1993, as it was not determinable if Holdings
would make
F-12
111
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES -- CONTINUED
additional funds available beyond the $3.7 million that was received that year.
Subsequently, the $4.7 million contribution was made by Holdings from other
available funds. The Company has since canceled the remaining balance of $3.0
million.
During the years ended January 28, 1996 and February 2, 1997, the Company
received approximately $14.1 million and $18.5 million, respectively, of
proceeds from the sale of realty and fixtures to an affiliate at amounts that
equaled the Company's cost, which approximated fair market value. The related
assets were subsequently leased back by the Company under operating lease
arrangements.
During fiscal 1995, two obligations of the Company to two of its vendors
incurred in connection with the purchase of products from such vendors were sold
by such vendors to an affiliate of the Company. At the time of the transfers,
the Company owed to these vendors the sum of approximately $16.5 million less
anticipated discounts of $0.8 million to the vendors. The obligation to the
affiliate was non-interest bearing and was paid in full in November 1996.
The Company also leases certain other facilities from related parties (see
Note 6).
Pursuant to an agreement (the "Real Estate Agreement") entered into at the
closing of the Acquisition and Financings, Transatlantic Finance, Ltd., an
affiliate of Carmel or one or more of its affiliates (each a "Funding Company"
and, collectively the "Funding Companies") will acquire and develop land and
buildings on sites selected by the Company and lease such sites to the Company
under operating leases. At the closing of each land purchase, a Funding Company,
as landlord, and the Company, as tenant, will enter into a triple net lease with
respect to such land, and the buildings and improvements erected or to be
erected thereon. The obligation of the Funding Companies to acquire and develop
additional properties will cease when the cost of all such acquisitions
(including construction costs) would exceed $50.0 million, provided that as
leased properties are disposed of to third parties by the Funding Companies,
funds available to purchase additional properties will be replenished. The term
of the commitment for the investment in such land purchases and leases commenced
on October 30, 1996 and will end on the earliest of (i) April 30, 2004, or (ii)
a termination of the Real Estate Agreement by Carmel or the Company, at their
respective options, upon the occurrence of certain events specified in the
Agreement. The Company believes the terms of the Real Estate Agreement to be at
least as favorable to it as could be obtained from unaffiliated third parties.
As of February 2, 1997, the Funding Company had 8 properties and associated
fixtures in various stages of completion which reduced availability under this
$50.0 million off-balance sheet facility by approximately $3.4 million.
F-13
112
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in thousands):
JANUARY 28, FEBRUARY 2,
1996 1997 ESTIMATED USEFUL LIFE
----------- ----------- -----------------------------
Land................................ $ 1,342 $ 1,114 --
Buildings........................... 1,763 1,301 25 years
Leasehold improvements.............. 39,483 43,694 15 years or life of lease
Furniture, fixtures and equipment... 52,773 53,889 10 years
Property under capital leases....... 43,863 46,488 5-15 years or life of lease
Purchased software.................. 4,679 5,009 5 years
----------- -----------
143,903 151,495
Less accumulated depreciation and
amortization...................... (63,885) (80,132)
----------- -----------
$ 80,018 $ 71,363
======== ========
Accumulated amortization of property under capital leases totaled $18.9
million, and $25.8 million at January 28, 1996 and February 2, 1997,
respectively.
NOTE 5 -- LONG TERM DEBT
On June 22, 1994, the Company restructured its existing long-term debt
obligations which were originally recorded at a value of $178.2 million into an
$81.0 million Amended and Restated Credit Agreement (the "Amended Credit
Agreement"), resulting in a gain on elimination of debt of $97.2 million. The
amount recorded under the then existing long-term obligations included principal
amounts, accrued interest and an unamortized premium resulting from a 1992
restructuring. The Company recorded the gain on elimination of debt as a
non-taxable event (see Note 11).
In February 1995, the Company entered into a $100.0 million credit
agreement (the "1995 Agreement"). Outstanding debt under the Amended Credit
Agreement was paid in full from borrowings under the 1995 Agreement. Pursuant to
the terms of the 1995 Agreement, the Company obtained a $5.0 million term loan
with monthly principal payments of $83,333 commencing April 1, 1995 and with a
final payment due in February 1997. The 1995 Agreement also provided for a
revolving credit facility of approximately $95.0 million. Amounts available
under the revolving credit facility were determined by inventory levels and by
the outstanding balance of the term loan. Interest was paid at LIBOR plus 3% on
outstanding balances of the term loan and revolving credit facility and prime
plus 1% on the remaining balance. The Company's average interest rate on amounts
outstanding under the 1995 Agreement at January 28, 1996 was 9.03%. On October
30, 1996, the Company repaid all amounts outstanding under the 1995 Agreement,
terminated the 1995 Agreement and entered into agreements with various lenders
for a $200.0 million Senior Credit Facility (the "Facility").
The Facility provides for (i) a $100.0 million term loan ("Term Loan"),
which was drawn down at the closing of the Acquisition and Financing and (ii) a
revolving credit commitment (the "Revolver") with maximum borrowing capacity of
approximately $100.0 million, none of which was drawn upon in connection with
the Acquisition and Financings. Borrowings made by the Company under the
Facility are collateralized by a first priority security interest in
substantially all of the personal property of the Company, subject to certain
permitted liens. Holdings also issued a guarantee of such borrowings under the
Facility, which guarantee is collateralized by a pledge by Holdings of all
issued and outstanding capital stock of the Company. Each of the U.S.
subsidiaries of the Company also issued a guarantee under the Facility which is
collateralized by a first priority security interest in substantially all
personal property of such subsidiary, and the Company
F-14
113
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LONG TERM DEBT -- CONTINUED
pledged the issued and outstanding capital stock of each such subsidiary owned
by the Company. The subsidiaries do not have any material assets or liabilities
or conduct any material operations. Accordingly, management believes that the
subsidiary guarantees do not enhance the likelihood that amounts borrowed under
the Facility will be repaid.
Amounts available to the Company to be borrowed under the Revolver are
subject to a borrowing base formula which is based upon certain percentages of
the Company's inventories.
The Facility accrues interest at either the Alternate Base Rate (the
"Alternate Base Rate") or an adjusted Eurodollar Rate (the "Eurodollar Rate"),
at the option of the Company, plus the applicable interest margin. The Alternate
Base Rate at any time is determined to be the highest of (i) the Federal Funds
Rate plus 1/2 of 1% per annum, (ii) the Base CD Rate (as defined below) plus 1%
per annum, and (iii) The Chase Manhattan Bank's prime rate. The applicable
interest margin with respect to loans made under the revolving credit facility
is 1.50% per annum with respect to loans that accrue interest at the Alternate
Base Rate and 2.50% per annum with respect to loans that accrue interest at the
Eurodollar Rate. The applicable interest margin is 2.00% with respect to any
portion of the term loan that accrues interest at the Alternate Base Rate and 3%
per annum with respect to any portion of the term loan that accrues interest at
the Eurodollar Rate. As used herein, "Base CD Rate" means the secondary market
rate for three-month certificates of deposit of money center banks, adjusted for
reserves and assessments.
Borrowings under the Facility at February 2, 1997 are as follows (in
thousands):
Term Loan, variable interest rates, average 8.6%, semi
annual installments payable June 30 and December 31
through 2003.............................................. $100,000
Revolver, variable interest rates, averaging 8.1%, due
October 31, 2001, $100 million maximum capacity subject to
borrowing base limitations, $43.1 million unborrowed
availability at February 2, 1997.......................... 38,000
--------
Total............................................. 138,000
Less: Current maturities.................................... 1,000
--------
$137,000
========
Commitment fees on available funds under the Revolver are payable quarterly
in arrears on the average daily unused amount of the total commitment at the
rate of 1/2 of 1% per annum. Commitment fees totaling $104,000 were incurred in
fiscal 1996.
The terms of the Facility include restrictions on investments, capital
expenditures, dividends and certain other payments and require the Company to
meet certain financial covenants. The Company was in compliance with all such
covenants at February 2, 1997.
F-15
114
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LONG TERM DEBT -- CONTINUED
Also on October 30, 1996, the Company issued $125.0 million of 11% Senior
Subordinated Notes, due November 1, 2006. The Old Notes were sold by the Company
in a transaction not registered under the Securities Act of 1933 in reliance
upon an exemption under such Act. The Old Notes mature on November 1, 2006 and
interest is payable semi-annually in arrears on May 1 and November 1, commencing
May 1, 1997. The Old Notes may be redeemed at the option of the Company on or
after November 1, 2001, in whole or in part, at the redemption prices (expressed
as percentage of principal amount) set forth below plus accrued and unpaid
interest to the applicable redemption date, if redeemed during the twelve-month
period beginning:
NOVEMBER 1, PERCENTAGE
------------------------------------------------------------------ ----------
2001.............................................................. 105.500%
2002.............................................................. 103.667%
2003.............................................................. 101.833%
2004 and thereafter............................................... 100.000%
In addition, at any time on or prior to November 1, 1999, the Company may
(but will not have the obligation to) redeem up to 35% of the aggregate
principal amount of the Old Notes at a redemption price of 110% of the principal
amount thereof, in each case plus accrued interest thereon to the redemption
date, with the net proceeds of a public stock offering; provided that at least
65% of the original aggregate principal amount of the Old Notes remain
outstanding immediately after the occurrence of such redemption; and provided
further that such redemption take place within 60 days of the date of the
closing of such public stock offering.
In addition, the Facility prohibits, with certain limited exceptions, the
optional or mandatory prepayment or other defeasance of the Notes. The Facility
further requires that, under certain circumstances, the Company make prepayments
of the term loans outstanding thereunder with (i) 75% of any Excess Cash Flow
(as defined in the Facility) and (ii) 50% of the Net Proceeds (as defined
therein) from certain offerings of the Company's voting stock.
Pursuant to a Registration Rights Agreement entered into by the Company,
the Company's subsidiaries and the initial purchasers of the Old Notes, an offer
to exchange all outstanding 11% Senior Subordinated Notes, due November 1, 2006
for 11% Series A Senior Subordinated Notes, due November 1, 2006 (the "Notes")
was filed with the Securities and Exchange Commission ("SEC") on February 28,
1997.
The terms of the Notes are substantially identical in all material respects
to the terms of the Old Notes except that the Notes are expected to be more
readily transferable as a result of the registration of their issuance under the
Securities Act of 1933.
Included in other assets are the following charges associated with the
Acquisition and Financings which have been deferred and are being amortized over
the life of the related debt instrument (in thousands):
FEBRUARY 2, 1997
----------------
Old Notes............................................................. $ 7,369
Term Loan............................................................. 2,819
Revolver.............................................................. 8,444
-------
18,632
Less: accumulated amortization........................................ (555)
-------
18,077
=======
F-16
115
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LONG TERM DEBT -- CONTINUED
At February 2, 1997, the estimated maturities of long term debt were:
FISCAL YEAR (IN THOUSANDS)
- ----------- --------------
1997............................................................. $ 1,000
1998............................................................. 1,000
1999............................................................. 1,000
2000............................................................. 1,000
2001............................................................. 64,000
Thereafter....................................................... 195,000
--------
$263,000
========
NOTE 6 -- LEASES
The Company leases its office and warehouse facilities and a majority of
its stores and equipment. Generally, store leases provide for minimum rentals
and the payments of utilities, maintenance, insurance and taxes. Certain store
leases also provide for contingent rentals based upon a percentage of sales in
excess of a stipulated minimum. The majority of lease agreements are for base
lease periods ranging from 15 to 20 years, with three to five renewal options of
five years each.
Operating lease rental expense is as follows (in thousands):
YEAR ENDED
--------------------------------------------------------
JANUARY 29, 1995 JANUARY 28, 1996 FEBRUARY 2, 1997
---------------- ---------------- ----------------
Minimum rentals........................ $41,703 $48,629 $51,214
Contingent rentals..................... 1,390 1,094 1,455
Sublease rentals....................... (4,411) (4,369) (4,763)
------- ------- -------
$38,682 $45,354 $47,906
======= ======= =======
Future minimum lease obligations under non-cancelable leases at February 2,
1997, are as follows (in thousands):
OPERATING CAPITAL
FOR FISCAL YEARS LEASES LEASES
---------------- --------- -------
1997........................................................ $ 51,955 $10,325
1998........................................................ 48,284 9,751
1999........................................................ 44,146 7,002
2000........................................................ 40,858 1,070
2001........................................................ 38,910 210
Thereafter.................................................. 193,321 1,273
-------- -------
$417,474 29,631
========
Less amounts representing interest.......................... (6,951)
-------
Present value of obligations................................ 22,680
Less current portion........................................ (7,007)
-------
Long-term obligations....................................... $15,673
=======
F-17
116
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- LEASES -- CONTINUED
The above amounts include future minimum lease obligations under operating
leases with affiliates totalling $42.9 million at February 2, 1997. Operating
lease rental expense under leases with affiliates totaled $1.4 million for the
year ended January 29, 1995, $1.8 million for the year ended January 28, 1996
and $3.2 million for the year ended February 2, 1997.
The implicit interest rate of capital leases varies from 8.8% to 14.4% with
an average implicit rate of approximately 11.0%.
NOTE 7 -- CAPITAL STOCK
On October 29, 1996, the Company's Articles of Incorporation were amended
and restated to change the Company's name to CSK Auto, Inc. from Northern
Automotive Corporation and to provide for the authorization of two classes of
Capital Stock: Redeemable Preferred Stock and Common Stock.
Redeemable Preferred Stock
The Board of Directors (the "Board") is authorized to issue up to 206,500
shares of Redeemable Preferred Stock, per share par value $.01 and liquidation
preference $1,000. Dividends accrue from the date of issuance at a rate of 12%
per annum computed on the basis of a 360 day year. All dividends are cumulative
and shall be paid semi-annually in arrears on April 30 and October 31 of each
year, commencing April 30, 1997. Dividends are payable in cash or by issuing
additional shares. The shares may be redeemed at any time or from time to time
at the option of the Company, at a per share redemption price of one thousand
and ten dollars ($1,010) plus accrued and unpaid dividends to the date fixed for
redemption.
Common Stock
The Board is authorized to issue up to 20,000 shares of Common Stock, par
value $.01. Shares of Common Stock entitle the holder to one vote for each share
held with respect to all matters voted on by the stockholders of the Company.
NOTE 8 -- REENGINEERING DISTRIBUTION OPERATIONS
During the fiscal year ended January 30, 1994, the Company initiated a plan
to reengineer its distribution operations. In connection with this plan, a
provision to operating expense of $3.6 million was made. The reengineering
charge includes estimated facilities and equipment charges in addition to other
related expenses. Net costs of approximately $1.5 million and $2.1 million were
charged against the accrual for the fiscal years ended January 29, 1995 and
January 28, 1996, respectively.
NOTE 9 -- EMPLOYEE BENEFIT PLANS
The Company provides various health, welfare and disability benefits to its
full-time employees which are funded primarily by Company contributions. The
Company does not provide post-employment or post-retirement health care or life
insurance benefits to its employees.
Retirement Program
The Company sponsors a 401(k) plan which is available to all employees of
the Company who have completed one year of continuous service. The Company
matches 20% of employee contributions up to 6% of the participant's base salary.
Participant contributions are subject to certain restrictions as set forth in
the
F-18
117
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- CONTINUED
Internal Revenue Code. The Company's matching contributions totaled $230,000,
$267,000 and $288,000 for fiscal years 1994, 1995 and 1996, respectively.
Staff Incentive Compensation Plan
The Company adopted the general and administrative staff incentive
compensation bonus plan (the "Incentive Plan") during May 1996. The Incentive
Plan is designed to reward eligible Company executives, managers and supervisors
for the achievement of pre-defined Company performance objectives. Generally,
employees at the supervisor level or above are eligible to participate in the
Incentive Plan. Expense under the Incentive Plan for fiscal 1996 totaled $1.0
million.
1996 Stock Option Plans
On October 30, 1996, subject to their approval by the Company's Board of
Directors, the Company awarded options to purchase shares of Class B Stock of
Holdings under its Associate Stock Option Plan (the "Associate Plan") and its
Executive Stock Option Plan (the "Executive Plan" and together with the
Associate Plan, the "Plans") in order to provide incentives to store managers
and salaried corporate and warehouse employees of the Company. In February 1997,
the Company's Board of Directors approved the Plans and the issuance of the
above-described options.
The Plans may be administered by a committee of the Board of Directors of
Holdings, which would have broad authority in administering and interpreting the
Plans, or, if a committee has not been appointed, by the entire Board of
Directors. The Plans provide that, at such time as Holdings has a class of
equity securities registered under Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the committee must consist entirely of
"Non-Employee Directors" (as defined in Rule 16b-3 under the Exchange Act). A
committee has not yet been appointed to administer the Plans.
Options to purchase up to an aggregate of 37,000 and 21,000 shares of Class
B Stock may be granted under the Associate Plan and the Executive Plan,
respectively. Options granted under the Plans may be options intended to qualify
as incentive stock options under Section 422 of the Internal Revenue Code of
1986, as amended, or options not intended to so qualify. In the event that an
optionee's employment with the Company is terminated, depending on the timing
and reasons for such termination, the Option may terminate, remain exercisable
for a short period or be replaced by a right to receive certain payments upon
completion of an initial public offering of Holdings' securities. In the event
of a sale of more than 80% of the outstanding shares of capital stock of
Holdings or 80% of its assets, the vested portion of an option and, under
circumstances, the unvested portion, will be purchased by Holdings.
Holdings has granted options to purchase 34,705 shares under the Associate
Plan and 14,356 shares under the Executive Plan. The exercise price applicable
to these options is $205.88 per share, the fair market value at the date of
grant based upon the price paid for such shares in the Acquisition. All options
expire on the seventh anniversary of the date of grant (or, under certain
circumstances, 30 days later).
Each option granted under the Plans will be subject to vesting provisions
and, whether or not then vested, will not become exercisable until the earlier
of the occurrence of an initial public offering of Holdings' securities and the
seventh anniversary of the date of grant. Options granted under the Associate
Plan will vest in three equal installments on the second, third and fourth
anniversaries of the date of their grant, assuming the associate's employment
continues during this period ("Four Year Vesting"). Options granted under the
Executive Plan will be subject to the Four Year Vesting as to 84% of such
options and performance vesting (over the same four years) as to the remaining
16%. The performance vesting criteria will be based upon achieving specified
operating results. Partial vesting of options subject to performance vesting
will occur if the
F-19
118
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- CONTINUED
Company achieves less than 95% of the specified operating results. Any portion
of options granted under the Executive Plan which are subject to performance
vesting and which do not vest during the four years will automatically vest 90
days prior to the end of the option's term. If the specified operating results
are exceeded for any year by at least 10%, the executive will receive options
for up to an additional 5% (20% on a cumulative basis) of his or her original
option grant.
Options outstanding at February 2, 1997 are:
GRANTED EXERCISED CANCELLED OUTSTANDING
- ------- --------- --------- -----------
49,586 -- (525) 49,061
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Had compensation costs for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in fiscal 1996 consistent with the provisions of SFAS No. 123,
net loss for fiscal 1996 would have been increased to the pro forma amount
indicated below (in thousands):
FISCAL 1996
-----------
Net Loss:
As reported.............................................. ($23,534)
Pro forma................................................ ($23,609)
The fair value of each option grant is estimated on the date of grant using
the Minimum Value Method of option pricing, based upon the following input
assumptions:
Dividend yield.............................................. 0%
Risk free interest rate..................................... 6.07%
Expected life of options.................................... 5 years
NOTE 10 -- SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest paid during fiscal years 1994, 1995 and 1996 amounted to $8.5
million, $13.4 million and $13.4 million, respectively. Such amounts include
interest paid on the bank credit facility and capital leases.
Income taxes paid during fiscal 1994 amounted to $264,000. No income taxes
were paid in fiscal years 1995 and 1996.
NOTE 11 -- INCOME TAXES
The Company and its subsidiaries are, with Holdings, members of a group
which, for federal income tax purposes, constitutes a consolidated group which
files a consolidated federal income tax return. Members of the group have
entered into an Intercompany Tax Allocation Agreement, as amended (the "Tax
Agreement"), with Holdings, pursuant to which (i) the Company's federal tax
liability, if any, computed on a separate return basis will not exceed the
aggregate tax liability of the entire consolidated group, (ii) the tax
liability, if any, of other members of the consolidated group may be reduced on
the utilization of a portion of the Company's tax loss carryforwards, and (iii)
for any year in which federal income taxes are payable on a consolidated basis,
each of the members of the consolidated tax group which, on a stand alone basis,
would have had a federal tax obligation for such year will be obligated to pay a
pro-rata portion of the consolidated tax obligation. At the beginning of the
fiscal year ended January 30, 1994, the Company prospectively adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). This standard requires that the Company compute its federal income tax
expense as if it were a separate taxpayer,
F-20
119
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- INCOME TAXES -- CONTINUED
irrespective of the provisions of the Tax Agreement. The difference between the
Company's current federal income tax liability calculated as if it were a
separate taxpayer and the actual amounts due under the Tax Agreement as of
January 29, 1995 was accounted for as additional paid in capital of the Company.
No such difference existed as of January 28, 1996 as other members participating
in the Tax Agreement did not utilize the tax loss carryforward generated by the
Company during such fiscal year. The Company does not anticipate that any such
difference will exist as of February 2, 1997 for the same reason.
The provision (benefit) for income taxes is comprised of the following (in
thousands):
YEAR ENDED
--------------------------------------------------------
JANUARY 29, 1995 JANUARY 28, 1996 FEBRUARY 2, 1997
---------------- ---------------- ----------------
Current:
Federal.............................. $ 992 $(1,801) $ --
State................................ 223 (406) --
------- ------- --------
1,215 (2,207) --
------- ------- --------
Deferred:
Federal.............................. 55 (2,922) (9,209)
State................................ (474) (318) (2,109)
------- ------- --------
(419) (3,240) (11,318)
------- ------- --------
Total........................ $ 796 $(5,447) $(11,318)
======= ======= ========
The following table summarizes the differences between the Company's
provision (benefit) for income taxes based on the Company's income before taxes
and actual amounts recorded by the Company (in thousands):
YEAR ENDED
--------------------------------------------------------
JANUARY 29, 1995 JANUARY 28, 1996 FEBRUARY 2, 1997
---------------- ---------------- ----------------
Income before taxes.................... $ 8,834 $(14,541) $(34,852)
Federal income tax rate................ 34% 34% 34%
------- -------- --------
Expected provision for income taxes.... 3,004 (4,944) (11,850)
State taxes, net of federal benefit.... 425 (671) (1,634)
State taxes, rate adjustment........... (496) -- --
Valuation allowance.................... (2,220) -- --
Other.................................. 83 168 2,166
------- -------- --------
Actual (benefit) provision for income
taxes................................ $ 796 $ (5,447) $(11,318)
======= ======== ========
As discussed in Note 5, the Company treated the $97.2 million gain on the
elimination of debt which occurred in the year ended January 29, 1995 as a
non-taxable event. As a result of this treatment, the Company lost the ability
to utilize approximately $60.0 million of net operating loss carryforwards. At
January 30, 1994, the Company carried a valuation allowance against the entire
amount of the carryforwards, and accordingly, the loss of such carryforwards had
no effect on the results of the operations of the Company for the year ended
January 29, 1995.
At January 30, 1994, a valuation allowance of $2.2 million existed as an
offset to the Company's deferred tax assets. The valuation allowance was
eliminated at January 29, 1995 due to the Company's forecasted ability to
utilize all deferred tax assets.
F-21
120
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- INCOME TAXES -- CONTINUED
The current and non-current deferred tax assets and liabilities consist of
the following (in thousands):
YEAR ENDED
-------------------------------------
JANUARY 28, 1996 FEBRUARY 2, 1997
---------------- ----------------
Gross deferred tax assets:
Store closing costs......................................... $ 2,048 $ 6,118
Salaries and benefits....................................... 2,847 7,710
Capital leases expenditures................................. 1,064 743
Internally developed software............................... 3,639 2,538
Preopening costs............................................ 1,933 2,267
Provision for site selection costs.......................... 1,566 3,243
Provision for bad debts..................................... 744 684
Tax loss carryforwards...................................... 1,860 3,616
Other....................................................... 655 716
------- -------
Total gross deferred tax assets..................... 16,356 27,635
------- -------
Gross deferred tax liabilities:
Inventory................................................... 8,159 8,991
Depreciation................................................ 2,023 1,152
------- -------
Total gross deferred tax liabilities................ 10,182 10,143
------- -------
Net deferred tax asset........................................ $ 6,174 $ 17,492
======= =======
The net tax asset (liability) is reflected in the accompanying
balance sheets as follows:
Current deferred tax liability, net......................... $ (3,045) $ (597)
Non-current deferred tax asset, net......................... 9,219 18,089
------- -------
Net deferred tax asset...................................... $ 6,174 $ 17,492
======= =======
The Company has recorded a deferred tax asset of $3.6 million as of
February 2, 1997 reflecting the benefit of tax loss carryforwards which expire
in 2012. Realization is dependent on generating sufficient taxable income prior
to expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all the deferred tax asset
will be realized. Accordingly, the Company believes that no valuation allowance
is required for deferred tax assets in excess of deferred tax liabilities. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
NOTE 12 -- COST OF STORE CLOSINGS
Activity in the provision for store closings and the related cost of store
closings is as follows (in thousands):
BEGINNING STORE CLOSING ENDING
FISCAL YEAR BALANCE COSTS PAYMENTS BALANCE
---------------------------------------- --------- ------------- -------- -------
1994.................................... $ 6,363 $ 2,678 $ (3,296) $ 5,745
1995.................................... 5,745 3,310 (3,757) 5,298
1996.................................... 5,298 14,904 (4,360) 15,842
F-22
121
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- COST OF STORE CLOSINGS -- CONTINUED
In January 1997, the Company updated its strategic plan relating to the
relocation of certain stores. As a result of the Acquisition and Financings, the
Company has greater access to capital resources and the availability of a
sale-leaseback facility for new stores, improving the Company's ability to
implement such relocations. While management believes that there will be
long-term operating benefits from this strategy, the Company will incur costs
for early lease terminations or negative sub-lease rentals for stores vacated
under this plan and, accordingly, a charge to earnings of approximately $12.9
million was recorded in January 1997.
The cost of store closings include management's best estimate of related
costs. The costs the Company ultimately incurs could differ materially.
NOTE 13 -- LEGAL MATTERS
The Company is a defendant in various legal matters arising from normal
business activities. Management believes that the ultimate outcome of these
matters will not have a material effect on the Company's results of operations,
financial position or cash flows.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
JANUARY 28, 1996 FEBRUARY 2, 1997
---------------------------- ----------------------------
ESTIMATED ESTIMATED
FAIR FAIR
CARRYING AMOUNT VALUE CARRYING AMOUNT VALUE
--------------- --------- --------------- ---------
Receivables..................... 25,448 25,448 28,511 28,511
Amounts due under the Facility
(including current
maturity).................... 96,062 96,062 138,000 138,000
Obligations under Old Notes..... -- -- 125,000 125,000
F-23
122
======================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
By Hand, Registered or Certified Mail
or Overnight Carrier:
The Bank of New York
101 Barclay Street
New York, New York 10286
By Facsimile:
(212) 571-3080
Attention: Reorganization Department-7E
Confirm by telephone: (212) 851-5920
(Originals of all documents submitted by facsimile should be sent promptly by
hand, overnight courier, or registered or certified mail)
NO BROKER, DEALER OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER
MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL AUGUST 11, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER
A PROSPECTUS.
======================================================
======================================================
CSK AUTO, INC. LOGO
CSK AUTO, INC.
OFFER FOR ALL OUTSTANDING
11% SENIOR
SUBORDINATED NOTES
DUE 2006
IN EXCHANGE FOR
11% SERIES A SENIOR
SUBORDINATED NOTES DUE 2006
GUARANTEED BY THE FOLLOWING SUBSIDIARIES OF CSK AUTO, INC.:
KRAGEN AUTO SUPPLY CO.
SCHUCK'S DISTRIBUTION CO.
------------------------------
PROSPECTUS
------------------------------
MAY 13, 1997
======================================================
123
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Arizona Business Corporation Act (the "ABCA") permits corporations, at
their discretion, to indemnify present and former directors, officers,
employees, or agents of an Arizona corporation with respect to expenses,
judgments, fines, and amounts paid in settlement by such persons, whether or not
authority for such indemnification is contained in the indemnifying
corporation's articles of incorporation or bylaws ("permissive
indemnification"). Under the ABCA, in order for a corporation to provide
permissive indemnification, a majority of the corporation's disinterested
directors, independent legal counsel, or the shareholders must find that the
conduct of the individual to be indemnified was in good faith and that the
individual reasonably believed that the conduct was in the corporation's best
interests (in the case of conduct in an "official capacity" with the
corporation) or that the conduct was at least not opposed to the corporation's
best interests (in all other cases). ABCA secs. 10-851, -855, -856. In the
case of any criminal proceeding, the finding must be to the effect that the
individual had no reasonable cause to believe the conduct was unlawful. Id.
Indemnification is permitted with respect to expenses, judgments, fines, and
amounts paid in settlement by such individuals. Id. Under certain circumstances,
the ABCA permits a corporation to pay a director's expenses in advance of a
final disposition of a proceeding. ABCA sec. 10-853.
In addition to permissive indemnification, in certain circumstances the
ABCA requires that a corporation provide indemnification. In the event of a
successful defense, a corporation must indemnify the successful director,
officer, employee, or agent against reasonable expenses, including attorneys'
fees, incurred in connection with the proceeding. ABCA secs. 10-852, 856. In
addition, the ABCA requires Arizona corporations to indemnify any "outside
director" (a director who is not an officer, employee, or holder of five percent
or more of any class of the corporation's stock) against liability unless (i)
the corporation's articles of incorporation limit such indemnification, (ii) the
outside director is adjudged liable in a proceeding by or in the right of the
corporation or in any other proceeding charging improper financial benefit to
the director, or (iii) a court determines, before payment to the outside
director, that the director failed to meet the standards of conduct described in
the preceding paragraph. Id. Under certain circumstances, the corporation may be
required to pay an outside director's expenses in advance of a final disposition
of a proceeding. Id. A court may also order that an individual be indemnified if
the court finds that the individual is fairly and reasonably entitled to
indemnification in light of all of the relevant circumstances, whether or not
the individual has met the standards of conduct in this and the preceding
paragraph. ABCA secs. 10-854, -856.
Article Ninth of the Company's Articles of Incorporation provide that the
Company will indemnify present and former directors and officers of the Company
and its subsidiaries and other "authorized representatives" to the fullest
extent permitted under the ABCA. The inclusion of these indemnification
provisions in the Company's Articles of Incorporation is intended to enable the
Company to attract qualified persons to serve as directors and officers who
might otherwise be reluctant to do so.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
1.01* -- Purchase Agreement, dated October 23, 1996, among CSK
Group, Ltd., the Company, Kragen Auto Supply Co.
("Kragen"), Schuck's Distribution Co. ("Schuck's"),
Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill").
1.02* -- Registration Rights Agreement, dated October 30, 1996,
between the Company, Kragen, Schuck's, DLJ and Merrill.
1.03* -- Form of Letter of Transmittal.
II-1
124
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.01* -- Stock Purchase Agreement, dated September 29, 1996.
3.01* -- Amended and Restated Articles of Incorporation of the
Company.
3.02* -- Amended and Restated By-laws of the Company.
3.03* -- Articles of Incorporation of Kragen.
3.04* -- Amended and Restated Bylaws of Kragen.
3.05* -- Articles of Incorporation of Schuck's.
3.06* -- Amended and Restated Bylaws of Schuck's.
4.01* -- Indenture by and among the Company, Kragen, Schuck's and
Wells Fargo Bank, N.A., as Trustee, dated as of October
30, 1996, including form of Old Note.
4.02* -- Form of Note.
4.03* -- Registration Rights Agreement, dated October 30, 1996,
between the Company, Kragen, Schuck's, DLJ and Merrill
(filed as Exhibit 1.02).
4.04* -- Form of Letter of Transmittal (filed as Exhibit 1.03).
4.05* -- Credit Agreement, dated as of October 30, 1996, among the
Company, the several Lenders from time to time parties
thereto, The Chase Manhattan Bank, as administrative
agent for the Lenders, and Lehman Commercial Paper Inc.,
as documentation agent for the Lenders and Chase
Securities Inc., as arranger.
5.01 -- Opinion of Gibson, Dunn & Crutcher LLP.
5.02 -- Opinion of Bryan Cave LLP.
5.03 -- Opinion of Ryan, Swanson & Cleveland, PLLC.
8.01* -- Opinion of Gibson, Dunn & Crutcher LLP regarding tax
matters.
10.01* -- Employment Agreement, dated June 19, 1996, between the
Company and Jules Trump.
10.02* -- Amended and Restated Employment Agreement, dated June 19,
1996, between the Company and James Bazlen.
10.03* -- Amended and Restated Employment Agreement, dated June 19,
1996, between the Company and Arthur Hicks.
10.04* -- Amended and Restated Participation Agreement, dated June
19, 1996, between the Company and James Bazlen.
10.05* -- Amended and Restated Participation Agreement, dated June
19, 1996, between the Company and Arthur Hicks.
10.06* -- 1996 Associate Stock Option Plan.
10.07* -- 1996 Executive Stock Option Plan.
10.08* -- 1996 General and Administrative Staff Incentive
Compensation Plan.
10.09* -- Real Estate Financing Agreement, dated as of October 30,
1996, between Cantrade Trust Company Limited, in its
capacity as trustee of The Carmel Trust, and the Company.
10.10* -- Amended and Restated Lease, dated October 23, 1989 (the
"Missouri Falls Lease"), between the Company and Missouri
Falls Associates Limited Partnership.
10.11* -- First Amendment to the Missouri Falls Lease, dated
November 22, 1991, between the Company and Missouri Falls
Associates Limited Partnership.
10.12* -- Amendment to Leases, dated as of October 30, 1996, by and
between Missouri Falls Associates Limited Partnership and
the Company.
II-2
125
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
10.13* -- Financing Advisory Agreement, dated October 30, 1996,
between the Company and Investcorp International Inc.
10.14* -- Financial Advisory Services Letter Agreement, dated
October 30, 1996, between the Company and Investcorp
International Inc.
10.15* -- Standby Loan Commitment Letter Agreement, dated October
30, 1996, between the Company and Invifin S.A.
10.16* -- Agreement for Management Advisory, Strategic Planning and
Consulting Services, dated October 30, 1996, between the
Company and Investcorp International Inc.
10.17* -- Stockholders' Agreement, dated October 30, 1997, by and
among the Initial Investcorp Group, Cantrade Trust
Company Limited, in its capacity as trustee of The Carmel
Trust, Holdings and the Company.
11.01* -- Statement re: Computation of Ratio of Earnings to Fixed
Charges.
16.01* -- Letter of Price Waterhouse LLP re Change in Certifying
Accountant.
21.01* -- Subsidiaries of the Company.
23.01 -- Consent of Price Waterhouse LLP.
23.02 -- Consent of Coopers & Lybrand L.L.P.
23.03 -- Consent of Gibson, Dunn & Crutcher LLP (included in
Exhibit 5.01).
23.04* -- Consent of Gibson, Dunn & Crutcher LLP (included in
Exhibit 8.01).
23.05 -- Consent of Bryan Cave LLP (included in Exhibit 5.02).
23.06 -- Consent of Ryan, Swanson & Cleveland, PLLC (included in
Exhibit 5.03).
24.01* -- Powers of Attorney (included on Signature Pages of
Registration Statement).
25.01* -- Statement of Eligibility of Trustee.
27.01* -- Financial Data Schedule.
- ---------------
* Previously filed.
(b) Financial Statement Schedule for the three years ended January 28,
1996: Schedule II -- Valuation and Qualifying Accounts and report of independent
accountants thereon.
(c) Report, Opinion or Appraisal from an Outside Party: None applicable.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described under Item 20 or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(b) The Company undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933, as amended; (ii) to reflect in the prospectus any facts or events
arising after the effective
II-3
126
date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement; and (iii) to include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(c) The Company undertakes to respond to requests for information that is
incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or
13 of this form, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
(d) The Company undertakes to supply by means of a post-effective amendment
all information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the Registration
Statement when it became effective.
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127
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Phoenix, Arizona on May 13, 1997.
CSK AUTO, INC.
By: /s/ JAMES G. BAZLEN
-----------------------------------
James G. Bazlen
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 13, 1997.
NAME TITLE
---- -----
* Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Maynard Jenkins
/s/ JAMES G. BAZLEN President, Chief Operating Officer, Chief
- ----------------------------------------------------- Financial Officer, and Director
James G. Bazlen (Principal Accounting Officer and
Principal Financial Officer)
* Director
- -----------------------------------------------------
Jules Trump
* Director
- -----------------------------------------------------
Eddie Trump
* Director
- -----------------------------------------------------
Savio W. Tung
* Director
- -----------------------------------------------------
Jon P. Hedley
Director
- -----------------------------------------------------
Edward G. Lord, III
* Director
- -----------------------------------------------------
Christopher J. O'Brien
* Director
- -----------------------------------------------------
Charles J. Philippin
* Director
- -----------------------------------------------------
Robert Smith
* Director
- -----------------------------------------------------
Christopher J. Stadler
*By: /s/ DON W. WATSON
------------------------------------------------
Don W. Watson
Attorney in Fact
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128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Phoenix, Arizona on May 13, 1997.
KRAGEN AUTO SUPPLY CO.
By: /s/ JAMES G. BAZLEN
-------------------------------------
James G. Bazlen
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 13, 1997.
NAME TITLE
---- -----
* Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Maynard Jenkins
/s/ JAMES G. BAZLEN President, Chief Operating Officer, Chief
- ----------------------------------------------------- Financial Officer, and Director
James G. Bazlen (Principal Accounting Officer and
Principal Financial Officer)
* Director
- -----------------------------------------------------
Jules Trump
* Director
- -----------------------------------------------------
Eddie Trump
* Director
- -----------------------------------------------------
Savio W. Tung
* Director
- -----------------------------------------------------
Jon P. Hedley
Director
- -----------------------------------------------------
Edward G. Lord, III
* Director
- -----------------------------------------------------
Christopher J. O'Brien
* Director
- -----------------------------------------------------
Charles J. Philippin
* Director
- -----------------------------------------------------
Robert Smith
* Director
- -----------------------------------------------------
Christopher J. Stadler
*By: /s/ DON W. WATSON
------------------------------------------------
Don W. Watson
Attorney in Fact
II-6
129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Phoenix, Arizona on May 13, 1997.
SCHUCK'S DISTRIBUTION CO.
By: /s/ JAMES G. BAZLEN
-------------------------------------
James G. Bazlen
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 13, 1997.
NAME TITLE
---- -----
* Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Maynard Jenkins
/s/ JAMES G. BAZLEN President, Chief Operating Officer, Chief
- ----------------------------------------------------- Financial Officer, and Director
James G. Bazlen (Principal Accounting Officer and
Principal Financial Officer)
* Director
- -----------------------------------------------------
Jules Trump
* Director
- -----------------------------------------------------
Eddie Trump
* Director
- -----------------------------------------------------
Savio W. Tung
* Director
- -----------------------------------------------------
Jon P. Hedley
Director
- -----------------------------------------------------
Edward G. Lord, III
* Director
- -----------------------------------------------------
Christopher J. O'Brien
* Director
- -----------------------------------------------------
Charles J. Philippin
* Director
- -----------------------------------------------------
Robert Smith
* Director
- -----------------------------------------------------
Christopher J. Stadler
*By: /s/ DON W. WATSON
------------------------------------------------
Don W. Watson
Attorney in Fact
II-7
130
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
In connection with our audit of the consolidated financial statements of
CSK Auto, Inc. and subsidiaries as of February 2, 1997 and for the year then
ended, which financial statements are included in the Prospectus, we have also
audited the financial statement schedule listed in Item 21(b) herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
April 22, 1997
S-1
131
SCHEDULE II
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK GROUP LTD.)
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
Year Ended January 29, 1995
Reserves for Closed Stores.............. 6,363 2,678 (3,296) 5,745
Reserves for Bad Debts.................. 2,128 1,447 (2,087) 1,488
Tax Valuation Allowance................. 2,220 -- (2,220) --
Year Ended January 28, 1996
Reserves for Closed Stores.............. 5,745 3,310 (3,757) 5,298
Reserves for Bad Debts.................. 1,488 1,437 (972) 1,953
Year Ended February 2, 1997
Reserves for Closed Stores.............. 5,298 14,904 (4,360) 15,842
Reserves for Bad Debts.................. 1,953 1,290 (1,475) 1,768
S-2
132
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
------- ----------------------- ----
1.01* -- Purchase Agreement, dated October 23, 1996, among CSK
Group, Ltd., the Company, Kragen Auto Supply Co.
("Kragen"), Schuck's Distribution Co. ("Schuck's"),
Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill").
1.02* -- Registration Rights Agreement, dated October 30, 1996,
between the Company, Kragen, Schuck's, DLJ and Merrill.
1.03* -- Form of Letter of Transmittal.
2.01* -- Stock Purchase Agreement, dated September 29, 1996.
3.01* -- Amended and Restated Articles of Incorporation of the
Company.
3.02* -- Amended and Restated By-laws of the Company.
3.03* -- Articles of Incorporation of Kragen.
3.04* -- Amended and Restated Bylaws of Kragen.
3.05* -- Articles of Incorporation of Schuck's.
3.06* -- Amended and Restated Bylaws of Schuck's.
4.01* -- Indenture by and among the Company, Kragen, Schuck's and
Wells Fargo Bank, N.A., as Trustee, dated as of October
30, 1996, including form of Old Note.
4.02* -- Form of Note.
4.03* -- Registration Rights Agreement, dated October 30, 1996,
between the Company, Kragen, Schuck's, DLJ and Merrill
(filed as Exhibit 1.02).
4.04* -- Form of Letter of Transmittal (filed as Exhibit 1.03).
4.05* -- Credit Agreement, dated as of October 30, 1996, among the
Company, the several Lenders from time to time parties
thereto, The Chase Manhattan Bank, as administrative
agent for the Lenders, and Lehman Commercial Paper Inc.,
as documentation agent for the Lenders and Chase
Securities Inc., as arranger.
5.01 -- Opinion of Gibson, Dunn & Crutcher LLP.
5.02 -- Opinion of Bryan Cave LLP.
5.03 -- Opinion of Ryan, Swanson & Cleveland, PLLC.
8.01* -- Opinion of Gibson, Dunn & Crutcher LLP regarding tax
matters.
10.01* -- Employment Agreement, dated June 19, 1996, between the
Company and Jules Trump.
10.02* -- Amended and Restated Employment Agreement, dated June 19,
1996, between the Company and James Bazlen.
10.03* -- Amended and Restated Employment Agreement, dated June 19,
1996, between the Company and Arthur Hicks.
10.04* -- Amended and Restated Participation Agreement, dated June
19, 1996, between the Company and James Bazlen.
10.05* -- Amended and Restated Participation Agreement, dated June
19, 1996, between the Company and Arthur Hicks.
10.06* -- 1996 Associate Stock Option Plan.
10.07* -- 1996 Executive Stock Option Plan.
10.08* -- 1996 General and Administrative Staff Incentive
Compensation Plan.
10.09* -- Real Estate Financing Agreement, dated as of October 30,
1996, between Cantrade Trust Company Limited, in its
capacity as trustee of The Carmel Trust, and the Company.
133
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
------- ----------------------- ----
10.10* -- Amended and Restated Lease, dated October 23, 1989 (the
"Missouri Falls Lease"), between the Company and Missouri
Falls Associates Limited Partnership.
10.11* -- First Amendment to the Missouri Falls Lease, dated
November 22, 1991, between the Company and Missouri Falls
Associates Limited Partnership.
10.12* -- Amendment to Leases, dated as of October 30, 1996, by and
between Missouri Falls Associates Limited Partnership and
the Company.
10.13* -- Financing Advisory Agreement, dated October 30, 1996,
between the Company and Investcorp International Inc.
10.14* -- Financial Advisory Services Letter Agreement, dated
October 30, 1996, between the Company and Investcorp
International Inc.
10.15* -- Standby Loan Commitment Letter Agreement, dated October
30, 1996, between the Company and Invifin S.A.
10.16* -- Agreement for Management Advisory, Strategic Planning and
Consulting Services, dated October 30, 1996, between the
Company and Investcorp International Inc.
10.17* -- Stockholders' Agreement, dated October 30, 1997, by and
among the Initial Investcorp Group, Cantrade Trust
Company Limited, in its capacity as trustee of The Carmel
Trust, Holdings and the Company.
11.01* -- Statement re: Computation of Ratio of Earnings to Fixed
Charges.
16.01* -- Letter of Price Waterhouse LLP re Change in Certifying
Accountant.
21.01* -- Subsidiaries of the Company.
23.01 -- Consent of Price Waterhouse LLP.
23.02 -- Consent of Coopers & Lybrand L.L.P.
23.03 -- Consent of Gibson, Dunn & Crutcher LLP (included in
Exhibit 5.01).
23.04* -- Consent of Gibson, Dunn & Crutcher LLP (included in
Exhibit 8.01).
23.05 -- Consent of Bryan Cave LLP (included in Exhibit 5.02).
23.06 -- Consent of Ryan, Swanson & Cleveland, PLLC (included in
Exhibit 5.03).
24.01* -- Powers of Attorney (included on Signature Pages of
Registration Statement).
25.01* -- Statement of Eligibility of Trustee.
27.01* -- Financial Data Schedule.
- ---------------
* Previously filed.