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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-13927
CSK AUTO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0765798
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
645 E. MISSOURI AVE. SUITE 400, PHOENIX, ARIZONA 85012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(602) 265-9200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORTS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ].
As of June 7, 1999, CSK Auto Corporation had 27,806,955 shares of common
stock outstanding.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CSK AUTO CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MAY 2, JANUARY 31,
1999 1999
----------- -----------
ASSETS
Cash and cash equivalents ............................................ $ 6,911 $ 7,490
Receivables, net of allowances of $1,815 and $1,703, respectively..... 59,584 58,867
Inventories .......................................................... 441,373 414,422
Assets held for sale ................................................. 3,285 5,018
Prepaid expenses and other current assets ............................ 20,631 18,295
--------- ---------
Total current assets ....................................... 531,784 504,092
--------- ---------
Property and equipment, net .......................................... 108,534 105,037
Leasehold interests, net ............................................. 9,336 9,643
Deferred income taxes ................................................ 7,450 10,695
Other assets, net .................................................... 8,118 7,209
--------- ---------
Total assets ............................................... $ 665,222 $ 636,676
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ..................................................... $ 132,736 $ 122,304
Accrued payroll and related expenses ................................. 22,985 25,962
Accrued expenses and other current liabilities ....................... 41,263 35,312
Current maturities of amounts due under Senior Credit Facility........ 840 840
Current maturities of capital lease obligations ...................... 7,828 8,749
Deferred income taxes ................................................ 4,046 4,046
--------- ---------
Total current liabilities .................................. 209,698 197,213
--------- ---------
Amounts due under Senior Credit Facility ............................. 232,320 224,320
Obligations under 11% Senior Subordinated Notes ...................... 81,250 81,250
Obligations under capital leases ..................................... 16,748 18,134
Other ................................................................ 9,639 10,370
--------- ---------
Total non-current liabilities .............................. 339,957 334,074
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares
authorized; 27,805,466 and 27,768,832 shares issued and
outstanding at May 2, 1999 and January 31, 1999, respectively...... 278 278
Additional paid-in capital ......................................... 290,532 289,820
Stockholder receivable ............................................. (715) (1,018)
Deferred compensation .............................................. (451) (493)
Accumulated deficit ................................................ (174,077) (183,198)
--------- ---------
Total stockholders' equity ................................. 115,567 105,389
--------- ---------
Total liabilities and stockholders' equity ................. $ 665,222 $ 636,676
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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CSK AUTO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THIRTEEN WEEKS ENDED
--------------------------------
MAY 2, MAY 3,
1999 1998
------------ ------------
Net sales .................................. $ 269,402 $ 238,423
Cost of sales .............................. 139,251 130,706
------------ ------------
Gross profit ............................... 130,151 107,717
Other costs and expenses:
Operating and administrative ............. 106,928 93,023
Transition and integration expenses ...... -- 3,075
Write-off of unamortized management fee .. -- 3,643
------------ ------------
Operating profit ........................... 23,223 7,976
Interest expense, net ...................... 7,349 9,198
------------ ------------
Income (loss) before income taxes,
extraordinary loss and cumulative
effect of change in accounting
principle ................................ 15,874 (1,222)
Income tax expense (benefit) ............... 6,012 (470)
------------ ------------
Income (loss) before extraordinary loss and
cumulative effect of change in
accounting principle .................... 9,862 (752)
Extraordinary loss, net of $4,236 of income
taxes .................................... -- (6,767)
------------ ------------
Income (loss) before cumulative effect of
change in accounting principle ........... 9,862 (7,519)
Cumulative effect of change in
accounting principle, net of $468 of
income taxes ............................. (741) --
------------ ------------
Net income (loss) .......................... $ 9,121 $ (7,519)
============ ============
Basic earnings (loss) per share:
Income (loss) before extraordinary loss
and cumulative effect of change in
accounting principle ................... $ 0.36 $ (0.03)
Extraordinary loss, net of income taxes .. -- (0.29)
------------ ------------
Income (loss) before cumulative effect of
change in accounting principle .......... 0.36 (0.32)
Cumulative effect of change in
accounting principle, net of income
taxes ................................... (0.03) --
------------ ------------
Net income (loss) ....................... $ 0.33 $ (0.32)
============ ============
Shares used in computing per share amounts 27,785,264 23,568,058
============ ============
Diluted earnings (loss) per share:
Income (loss) before extraordinary loss
and cumulative effect of change in
accounting principle .................... $ 0.34 $ (0.03)
Extraordinary loss, net of income taxes .. -- (0.29)
------------ ------------
Income (loss) before cumulative effect of
change in accounting principle .......... 0.34 (0.32)
Cumulative effect of change in
accounting principle, net of income
taxes ................................... (0.02) --
------------ ------------
Net income (loss) ....................... $ 0.32 $ (0.32)
============ ============
Shares used in computing per share amounts 28,867,765 23,568,058
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
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CSK AUTO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
----------------------- PAID-IN STOCKHOLDER DEFERRED ACCUMULATED TOTAL
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT EQUITY
---------- ---------- ---------- ----------- ------------ ----------- ----------
Balances at January 31, 1999 27,768,832 $ 278 $ 289,820 $ (1,018) $ (493) $ (183,198) $ 105,389
Amortization of deferred
compensation (unaudited) .. -- -- -- -- 42 -- 42
Recovery of stockholder
receivable (unaudited) .... -- -- -- 303 -- -- 303
Exercise of options
(unaudited) ................. 36,634 -- 441 -- -- -- 441
Tax benefit of exercise of
options (unaudited) ....... -- -- 271 -- -- -- 271
Net income (unaudited) ...... -- -- -- -- -- 9,121 9,121
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at May 2, 1999
(unaudited) ............... 27,805,466 $ 278 $ 290,532 $ (715) $ (451) $ (174,077) $ 115,567
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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CSK AUTO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THIRTEEN WEEKS ENDED
----------------------
MAY 2, MAY 3,
1999 1998
--------- ---------
Cash flows provided by (used in) operating activities:
Net income (loss) ................................................ $ 9,121 $ (7,519)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment ......... 5,586 5,280
Amortization of leasehold interests ............................. 202 242
Amortization of other deferred charges .......................... 108 226
Amortization of deferred financing costs ........................ 238 296
Tax benefit relating to stock option exercises .................. 271 --
Extraordinary loss on early retirement of debt, net of
income taxes ................................................... -- 6,767
Cumulative effect of change in accounting principle, net
of income taxes ................................................ 741 --
Write-off of unamortized management fee ......................... -- 3,643
Deferred income taxes ........................................... 3,713 (470)
Change in operating assets and liabilities:
Receivables .................................................... (717) 122
Inventories .................................................... (26,951) (5,891)
Prepaid expenses and other current assets ...................... (261) 960
Accounts payable ............................................... 10,432 19,522
Accrued payroll, accrued expenses and other
current liabilities ........................................... 2,974 (9,083)
Other operating activities ..................................... (1,952) (3,282)
--------- ---------
Net cash provided by operating activities ....................... 3,505 10,813
--------- ---------
Cash flows used in investing activities:
Capital expenditures ............................................. (11,473) (10,814)
Expenditures for assets held for sale ............................ (1,517) (3,194)
Proceeds from sale of property and equipment and assets
held for sale .................................................. 2,488 1,429
Due to affiliate ................................................. -- (1,000)
Other investing activities ....................................... (19) (124)
--------- ---------
Net cash used in investing activities ........................... (10,521) (13,703)
--------- ---------
Cash flows provided by financing activities:
Borrowings under Senior Credit Facility .......................... 48,000 45,000
Payments under Senior Credit Facility ............................ (40,000) (99,050)
Issuance of common stock in initial public offering .............. -- 172,482
Underwriter's discount and other IPO costs ....................... -- (13,377)
Premiums paid upon early retirement of debt ...................... -- (4,875)
Retirement of 11% Senior Subordinated Notes ...................... -- (43,750)
Retirement of 12% Subordinated Notes ............................. -- (50,000)
Payments on capital lease obligations ............................ (2,307) (2,190)
Recovery of stockholder receivable ............................... 303 150
Exercise of options .............................................. 441 --
Other financing activities ....................................... -- (153)
--------- ---------
Net cash provided by financing activities ...................... 6,437 4,237
--------- ---------
Net increase (decrease) in cash and cash equivalents ........... (579) 1,347
Cash and cash equivalents, beginning of period ..................... 7,490 4,852
--------- ---------
Cash and cash equivalents, end of period ........................... $ 6,911 $ 6,199
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
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CSK AUTO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED MAY 2, 1999
CSK Auto Corporation is a holding company. At May 2, 1999, CSK Auto
Corporation had no business activity other than its investment in CSK Auto,
Inc., a wholly-owned subsidiary ("Auto"). On a consolidated basis, CSK Auto
Corporation and Auto are referred to herein as the "Company."
Auto is a specialty retailer of automotive aftermarket parts and
accessories. At May 2, 1999, the Company operated 822 stores in 13 Western
states as a fully integrated company under three brand names: Checker Auto
Parts, founded in 1969 and operating in the Southwestern and Rocky Mountain
states; Schuck's Auto Supply, founded in 1917 and operating in the Pacific
Northwest; and Kragen Auto Parts, founded in 1947 and operating primarily in
California.
NOTE 1 -- BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein were
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"), but do not include all information and
footnotes required by generally accepted accounting principles. In the opinion
of management, the condensed consolidated financial statements reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the Company's financial position and the results of its
operations. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes thereto
for the fiscal year ended January 31, 1999, as included in the Company's Annual
Report on Form 10-K.
NOTE 2 -- INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined
utilizing the last-in, first-out (LIFO) method. An actual valuation of inventory
under the LIFO method can only be calculated at the end of a fiscal year based
upon the inventory levels and costs at that time. Accordingly, interim LIFO
calculations reflected herein are based upon management's estimates of year-end
inventory levels and costs. The replacement cost of inventories approximated
$382.7 million and $356.7 million at May 2, 1999 and January 31, 1999,
respectively.
NOTE 3 -- EARNINGS PER SHARE
Calculation of shares used in computing per share amounts is summarized as
follows (unaudited):
THIRTEEN WEEKS ENDED
-------------------------
MAY 2, MAY 3,
1999 1998
---------- ----------
Common stock outstanding:
Beginning of period ............................ 27,768,832 19,113,388
========== ==========
End of period .................................. 27,805,466 27,738,388
========== ==========
Issued during the period ......................... 36,634 8,625,000
========== ==========
Weighted average number of shares (Basic) ....... 27,785,264 23,568,058
Effects of dilutive securities ................... 1,082,501 --
---------- ----------
Weighted average number of shares
(Dilutive) ....................................... 28,867,765 23,568,058
========== ==========
Weighted average shares issuable under employee stock options totaling
948,129 are excluded from the shares used in computing per share amounts for the
thirteen weeks ended May 3, 1998 because their effect is anti-dilutive.
NOTE 4 -- RECENT ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Cost of ComputerSoftware Developed or Obtained for
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CSK AUTO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED MAY 2, 1999
Internal Use." The SOP defines the characteristics of internal-use computer
software, the criteria for capitalization and financial statement disclosure
requirements. The SOP is effective for fiscal years beginning after December 15,
1998, with earlier application encouraged. The Company adopted SOP 98-1 in the
first quarter of fiscal 1999 and such adoption did not have a material effect on
the Company's financial condition or results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-5, "Reporting on the
Cost of Start-up Activities." The SOP broadly defines start-up activities as
those one-time activities related to opening a new facility, introducing a new
product or service, conducting business in a new territory, or commencing some
new operation. The SOP requires that the costs of start-up activities be
expensed as incurred and is effective for financial statements for fiscal years
beginning after December 15, 1998, with earlier application encouraged. The
Company's historical accounting policy with respect to the cost of start-up
activities (store preopening expenses) was to defer such costs for the
approximately three month period of time that it takes to develop a new store
facility and to expense such costs during the month that the new store opens.
The Company adopted SOP 98-5 in the first quarter of fiscal 1999, which required
the Company to change its accounting policy to expense start-up costs as
incurred. Upon adoption, the Company expensed approximately $741,000, net of an
income tax benefit of $468,000, of preopening expenses that had been deferred as
of January 31, 1999. Such expense is reflected in the accompanying consolidated
statement of operations as the cumulative effect of a change in accounting
principle.
NOTE 5 -- LEGAL MATTERS
The Company was served with a lawsuit that was filed in the Superior Court
in San Diego, California on May 4, 1998. The case is brought by two former store
managers and a former assistant manager. It purports to be a class action for
all present and former California store managers and senior assistant managers
and seeks overtime pay for a period beginning in May 1995 as well as injunctive
relief requiring overtime pay in the future. This case is in the early stages of
discovery. The Company was also served with two other lawsuits purporting to be
class actions filed in California state courts in Orange and Fresno Counties by
thirteen other former and current employees. These lawsuits include similar
claims to the San Diego lawsuit, except that they also include claims for unfair
business practices which seek overtime from October 1994. The Orange County
lawsuit initially included a claim for punitive damages based on an unlawful
conversion theory. On March 9, 1999, the Orange County court dismissed the
conversion theory and claim for punitive damages but gave the plaintiff 30 days
to refile an amended claim. These plaintiffs have since filed an amended
complaint which also includes a claim for conversion and asks for punitive
damages. The Company has again requested the court to eliminate these items from
the case. The three cases have recently been "coordinated" before one judge in
San Diego County. If these cases are permitted by the courts to proceed as a
class action and are decided against the Company, the aggregate potential
exposure could be material to the Company's results of operations for the year
in which the cases are ultimately decided. The Company does not believe,
however, that such an adverse outcome, if it were to happen, would materially
affect the financial position or operations in subsequent periods. Although
at this early stage in the litigation it is difficult to predict their outcomes
with any certainty, the Company believes that there are meritorious defenses to
all of these cases and intends to defend them vigorously.
The Company currently and from time to time is involved in other litigation
incidental to the conduct of our business. The damages claimed 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 our
consolidated financial condition, results of operations or cash flow.
NOTE 6 -- SUBSEQUENT EVENTS
On May 17, 1999, the Company entered into a definitive agreement to acquire
substantially all of the assets of Apsco Products Company dba Big Wheel/Rossi
("Big Wheel"), the leading retailer of auto parts in the Northern Plains states.
Big Wheel operates 86 stores in Minnesota, North Dakota and Wisconsin along with
a distribution center in Minnesota. Based on the agreement, the Company will pay
approximately $60 million in cash for substantially all the assets and will
assume certain indebtedness of Big Wheel of approximately $5 million.
The Company plans to fund the acquisition with proceeds from its Senior
Credit Facility. In connection with the acquisition, the Company has signed a
commitment letter to amend and restate the Senior Credit Facility to provide an
additional $125.0 million senior term loan facility. The Company will use
approximately $65.0 million of this Facility in conjunction with the Big Wheel
acquisition and the remaining $60.0 million will be used to fund transition
costs and to reduce the balance of the revolving credit portion of the Senior
Credit Facility.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Our business is somewhat seasonal in nature, with the highest sales
occurring in the summer months of June through August (overlapping our second
and third fiscal quarters). Our business is, in addition, affected by weather
conditions. While unusually severe or inclement weather tends to reduce sales as
our customers tend to defer elective maintenance during such periods, extremely
hot and cold temperatures tend to enhance sales by causing auto parts to fail
and sales of seasonal products to increase.
Results of Operations
The following table expresses the statements of operations as a percentage
of sales for the periods shown:
THIRTEEN WEEKS ENDED
--------------------
MAY 2, MAY 3,
1999 1998
----- -----
Net sales .......................................... 100.0% 100.0%
Cost of sales ...................................... 51.7 54.8
----- -----
Gross profit ....................................... 48.3 45.2
Operating and administrative ....................... 39.7 39.0
Transition and integration expenses ................ -- 1.3
Write-off of unamortized management
fee ................................................ -- 1.5
----- -----
Operating profit ................................... 8.6 3.4
Interest expense, net .............................. 2.7 3.9
----- -----
Income (loss) before income taxes,
extraordinary loss and cumulative
effect of change in accounting
principle ........................................ 5.9 (0.5)
Income tax expense (benefit) ....................... 2.2 (0.2)
----- -----
Income (loss) before extraordinary
loss and cumulative effect of
change in accounting principle ................... 3.7 (0.3)
Extraordinary loss, net of income
taxes .............................................. -- (2.8)
----- -----
Income (loss) before cumulative
effect of change in accounting
principle ........................................ 3.7 (3.1)
Cumulative effect of change in
accounting principle, net of income
taxes ............................................ (0.3) --
----- -----
Net income (loss) .................................. 3.4% (3.1)%
===== =====
THIRTEEN WEEKS ENDED MAY 2, 1999 COMPARED TO THIRTEEN WEEKS ENDED MAY 3, 1998
Net sales for the thirteen weeks ended May 2, 1999 (the "first quarter of
fiscal 1999") increased $31.0 million, or 13.0%, over net sales for the thirteen
week period ended May 3, 1998 (the "first quarter of fiscal 1998"), primarily
reflecting an increase in the number of stores operated. Our comparable store
sales increased $8.4 million, or 4%, between these two periods. During the first
quarter of fiscal 1999, we opened 17 new stores, acquired 2 stores, relocated 5
stores, expanded 4 stores and closed 4 stores in addition to those closed due to
relocation. At May 2, 1999, we had 822 stores in operation compared to 730
stores at the end of the first quarter of fiscal 1998.
Gross profit for the first quarter of fiscal 1999 was $130.2 million, or
48.3% of net sales, compared to $107.7 million, or 45.2% of net sales, for the
comparable period of fiscal 1998. The increase in gross profit percentage
primarily resulted from our ability to obtain generally better pricing and more
favorable terms and support from our vendors due to increased purchase volume,
improved financial performance and stronger capitalization. The improved pricing
and vendor support was not fully realized until after the first quarter of
fiscal 1998 when we completed our initial public offering ("IPO"), contributing
to the increase in gross margin in the quarter-to-quarter comparison.
Operating and administrative expenses increased by $13.9 million to $106.9
million, or 39.7% of net sales, for the first quarter of fiscal 1999 from $93.0
million, or 39.0% of net sales, for the comparable period of fiscal 1998. The
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increase is primarily the result of the operating costs of new stores that are
in the early stages of maturation.
Operating profit increased to $23.2 million, or 8.6% of net sales, for the
first quarter of fiscal 1999 compared to $8.0 million, or 3.4% of net sales, for
the comparable period of fiscal 1998, due to the factors cited above. In
addition, the first quarter of fiscal 1998 was affected by $3.1 million of
expenses associated with the integration of the Trak West stores into our
operations and a $3.6 million non-recurring charge associated with the
termination of a management agreement as a result of our IPO.
Interest expense for the first quarter of fiscal 1999 totaled $7.3 million
compared to $9.2 million for the first quarter of fiscal 1998. The expense
decreased primarily as a result of the early retirement of approximately $147.6
million of outstanding debt with the proceeds of our IPO. The retirement of this
debt in fiscal 1998 also produced an extraordinary loss of $6.8 million, net of
tax, which consisted primarily of prepayment premiums paid in connection with
the redemption of debt and the write-off of a portion of deferred debt issuance
costs. In addition, interest rates on variable rate debt were generally lower
during the first quarter of fiscal 1999.
Income tax expense for the first quarter of fiscal 1999 was $6.0 million
compared to an income tax benefit of $0.5 million for the comparable period of
fiscal 1998. Our effective tax rate remained fairly consistent at approximately
38% of pre-tax income in both periods.
The first quarter of fiscal 1999 was affected by a charge of $.7 million,
net of tax, relating to the cumulative effect of a change in accounting
principle associated with the adoption of SOP 98-5. See Note 4 to the
Consolidated Financial Statements.
As a result of the above factors, net income increased to $9.1 million, or
$.32 per diluted common share, for the first quarter of fiscal 1999, compared to
a net loss of $7.5 million, or $(0.32) per diluted common share, for the first
quarter of fiscal 1998. In addition, earnings before interest, taxes,
depreciation and amortization ("EBITDA") increased by $8.7 million to $29.1
million in the first quarter of fiscal 1999, compared to $20.4 million for the
first quarter of fiscal 1998. While EBITDA is not intended to represent cash
flow from operations as defined by GAAP (and should not be considered as an
indicator of operating performance or an alternative to cash flow (as measured
by GAAP)), it is included herein because we believe it is a meaningful measure
which provides additional information with respect to our ability to meet our
future debt service, capital expenditure and working capital requirements.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements include working capital (primarily inventory),
debt service obligations and capital expenditures. We finance our cash
requirements with cash flow from operations, funds from our leasing facility and
borrowings under our revolving and term loan credit facility. At May 2, 1999, we
had net working capital of approximately $322.1 million and total liquidity
(cash plus availability under our revolving credit facility) of approximately
$32.7 million. We also have access to an off-balance sheet operating lease
facility that is used to finance new store construction. The facility provides
up to $125 million of funding for the acquisition and development of 100 to 125
new stores over the period of February 1, 1998 through May 31, 1999. As of May
2, 1999, approximately $60.7 million of this $125 million leasing facility had
been committed. We have reached an agreement in principle with this funding
source for an extension and expansion of this lease facility upon terms and
conditions that are generally consistent with the present arrangement. Final
documentation of this agreement is expected to be completed in June 1999. Our
revolving credit facility provides for borrowings of up to $125 million, of
which $25.8 million of unused capacity was available at May 2, 1999. Of the
committed revolving credit facility balance, $87.0 million represents amounts
drawn on the facility and $12.2 million represents outstanding letters of
credit. We believe that cash flow from operations combined with the availability
of funds under the leasing facility and the Senior Credit Facility will be
sufficient to support our operations and liquidity requirements for the
foreseeable future.
On May 17, 1999, we entered into a definitive agreement to acquire
substantially all of the assets of Apsco Products Company dba Big Wheel/Rossi
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("Big Wheel"), the leading retailer of auto parts in the Northern Plains states.
Big Wheel operates 86 stores in Minnesota, North Dakota and Wisconsin along with
a distribution center in Minnesota. Based on the agreement, we will pay
approximately $60 million in cash for substantially all the assets and will
assume certain indebtedness of Big Wheel of approximately $5 million. We plan to
close this transaction during the second quarter of fiscal 1999.
We plan to fund the acquisition with proceeds from the Senior Credit
Facility. In connection with the acquisition, we have signed a commitment letter
to amend and restate the Senior Credit Facility to provide an additional $125.0
million senior term loan facility. We will use approximately $65.0 million of
this Facility in conjunction with the Big Wheel acquisition and the remaining
$60.0 million will be used to fund transition costs and to reduce the balance on
the revolving credit portion of the Senior Credit Facility. We plan to complete
this amendment and restatement during the second quarter of fiscal 1999.
We acquired 2 stores and opened 26 new, relocated or expanded stores in the
first quarter of fiscal 1999 compared to 28 new, relocated or expanded stores in
the first quarter of fiscal 1998. We expect to open, relocate or expand
approximately 150 stores during fiscal 1999. We anticipate that the majority of
these new, relocated or expanded stores will be financed by our lease facility
under arrangements structured as operating leases that require no net capital
expenditures except for fixtures and store equipment.
For the first quarter of fiscal 1999, net cash provided by operating
activities was $3.5 million compared to $10.8 million during the comparable
period of fiscal 1998. The largest component of the change in cash flows from
operating activities relates to our investment in inventories, where $27.0
million of cash was used in operating activities during fiscal 1999 compared to
$5.9 million used for such purposes during fiscal 1998. The increase in
inventories reflects the increase in number of stores operated, a seasonal
build-up of certain products in anticipation of the higher volume summer selling
season and the addition of a branded line of premium starters and alternators.
Net cash flows from operations in the first quarter of fiscal 1999 were,
however, favorably impacted by the increasing profitability of our operations.
Net cash used in investing activities totaled $10.5 million for the first
quarter of fiscal 1999, compared to $13.7 million in the comparable period of
fiscal 1998. The decrease in cash used in investing activities was primarily the
result of generally smaller disbursements for capital expenditures and assets
held for sale under our new store development program during fiscal 1999 as well
as $1.0 million in payments to an affiliate in fiscal 1998.
Net cash provided by financing activities totaled $6.4 million for the first
quarter of fiscal 1999 compared to $4.2 million in the comparable period of
fiscal 1998. In the 1999 period, net cash provided by financing activities
consisted of $8.0 million of net borrowings under the revolving credit facility,
$2.3 million of payments on capital lease obligations, receipt of $0.3 million
of stockholder receivables and $0.4 million in proceeds from stock option
exercises. In the 1998 period, we borrowed $45.0 million under the senior credit
facility, made payments of debt of $45.2 million, made payments of capital lease
obligations of $2.2 million, received $0.2 million of stockholder receivables
and paid $0.2 million in connection with other financing activities. In
addition, during the 1998 period we received gross proceeds of $172.5 million in
connection with our IPO, which were applied as follows: (1) $13.4 million to pay
underwriters' discounts and other transaction costs; (2) $50.0 million to retire
all outstanding 12% Subordinated Notes; (3) $43.8 million to retire certain of
the 11% Senior Subordinated Notes; (4) $53.8 million to pay certain outstanding
balances under the Senior Credit Facility; and (5) $4.9 million to pay premiums
in connection with the retirement of certain of the aforementioned debt
instruments and the balance to pay accrued interest and for general corporate
purposes.
YEAR 2000 CONVERSION
Historically, certain computerized systems have used two digits rather than
four to define the applicable year. Computer equipment and software and devices
with imbedded technology that are time-sensitive may recognize a date using "00"
as the year 1900 rather than the year 2000, resulting in system failures or
miscalculations. This problem is generally referred to as "the Year 2000 issue."
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During fiscal 1997, we began a comprehensive review of our systems and
applications for Year 2000 compliance. We also engaged an independent advisor to
evaluate and assist us with our Year 2000 program. To date, we have completed
the identification phase and we are 98% complete with the assessment phase of
our Year 2000 conversion. We have included both information technology, such as
purchased software and point-of-sale computer systems, and non-information
technology equipment, such as warehouse conveyor systems, in our evaluations. In
addition, we have identified our key third-party business partners and we are
coordinating with them to address potential Year 2000 issues. These issues
include data exchange with us as well as their shipping and warehousing
processes.
Although we anticipate minimal business disruption will occur in our systems
as a result of the Year 2000 issue, possible consequences include a loss of
communications links with certain store locations, and the inability to process
transactions, send purchase orders, or engage in similar normal business
activities. We presently believe that with modifications to existing software
and conversions to new software, the risk of our Year 2000 conversion can be
mitigated. However, if we do not make the necessary modifications and
conversions, or do not complete them in a timely manner, it could have a
material adverse effect on our operations.
We currently anticipate that our Year 2000 identification, assessment,
remediation and testing efforts, will be completed by September 30, 1999,
although we will continue to run system tests throughout the remainder of the
year. As of May 2, 1999, we have completed approximately 85% of our Year 2000
initiatives. To date, we have incurred and expensed approximately $0.9 million
related to the assessment of and preliminary efforts in connection with our Year
2000 conversion project. To date, we have also capitalized approximately $5.3
million in connection with the replacement of certain hardware and software
applications.
We estimate the total remaining cost of our Year 2000 conversion to be $2.9
million, which is being funded with lease financing and operating cash flows. Of
the total project cost, we attribute approximately $1.9 million to the purchase
of new hardware and software which will be capitalized. We will expense the
remaining $1.0 million as incurred during fiscal 1999.
We have begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from our failure and the failure of certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. We are also currently finalizing contingency plans which we expect
to be completed by August 1999. Elements of our contingency plans include:
switching vendors, back-up systems or manual processes, and the potential
stockpiling of certain products prior to the Year 2000.
The costs of our Year 2000 conversion and the date on which we plan to
complete the project are based upon our management's best estimates, which were
derived utilizing numerous assumptions of future events. We cannot guarantee
that we will achieve these estimates. Specific factors that could cause material
differences between our actual results and our estimates include: (1) the
availability and cost of personnel trained in this area; (2) the success of
third parties in their Year 2000 conversion plans; (3) the cost of implementing
contingency plans; and (4) the ability to locate and correct all relevant
computer codes and similar uncertainties.
FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains certain
forward-looking statements about the future performance of the Company that are
based on management's assumptions and beliefs in light of the information
currently available. These forward-looking statements are subject to
uncertainties and other factors that could cause actual results to differ
materially from those statements. Factors that may cause differences are
identified in the Company's Annual Report on Form 10-K, and are incorporated
herein by reference.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We were served with a lawsuit that was filed in the Superior Court in San
Diego, California on May 4, 1998. The case is brought by two former store
managers and a former assistant manager. It purports to be a class action for
all present and former California store managers and senior assistant managers
and seeks overtime pay for a period beginning in May 1995 as well as injunctive
relief requiring overtime pay in the future. This case is in the early stages of
discovery. We were also served with two other lawsuits purporting to be class
actions filed in California state courts in Orange and Fresno Counties by
thirteen other former and current employees. These lawsuits include similar
claims to the San Diego lawsuit, except that they also include claims for unfair
business practices which seek overtime from October 1994. The Orange County
lawsuit initially included a claim for punitive damages based on an unlawful
conversion theory. On March 9, 1999, the Orange County court dismissed the
conversion theory and claim for punitive damages but gave the plaintiff 30 days
to refile an amended claim. These plaintiffs have since filed an amended
complaint which also includes a claim for conversion and asks for punitive
damages. We have again requested the court to eliminate these items from the
case. The three cases have recently been "coordinated" before one judge in San
Diego County. If these cases are permitted by the courts to proceed as a class
action and are decided against us, our aggregate potential exposure could be
material to our results of operations for the year in which the cases are
ultimately decided. We do not believe, however, that such an adverse outcome, if
it were to happen, would materially affect our financial position or our
operations in subsequent periods. Although at this early stage in the litigation
it is difficult to predict their outcomes with any certainty, we believe that we
have meritorious defenses to all of these cases and intend to defend them
vigorously.
We currently and from time to time are involved in other litigation
incidental to the conduct of our business. The damages claimed against us in
some of these litigations are substantial. Although the amount of liability that
may result from these matters cannot be ascertained, we do not currently believe
that, in the aggregate, they will result in liabilities material to our
consolidated financial condition, results of operations or cash flow.
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.01* Restated Certificate of Incorporation of the Company.
3.02* Certificate of Correction to the Restated Certificate of
Incorporation of the Company.
3.03** Amended and Restated By-laws of the Company.
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10.01*** CSK Auto Corporation 1996 Executive Stock Option Plan (Amended
and Restated June 8, 1999).
10.02*** CSK Auto Corporation 1999 Employee Stock Option Plan.
27.01 Financial Data Schedule.
- ------------
* Incorporated herein by reference to our Annual Report on Form
10-K, filed on May 4, 1998 (Reg. No. 001-13927).
** Incorporated herein by reference to our Annual Report on Form
10-K, filed on April 28, 1999 (Reg. No. 001-13927).
*** Incorporated herein by reference to our definitive Proxy
Statement, filed on May 11, 1999 (Reg. No. 001-13927).
(b) Reports on Form 8-K: None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSK Auto Corporation
By: /s/ Don W. Watson
-----------------------
Don W. Watson
Chief Financial Officer
DATED: June 16, 1999
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.01* Restated Certificate of Incorporation of the Company.
3.02* Certificate of Correction to the Restated Certificate of
Incorporation of the Company.
3.03** Amended and Restated By-laws of the Company.
10.01*** CSK Auto Corporation 1996 Executive Stock Option Plan (Amended
and Restated June 8, 1999).
10.02*** CSK Auto Corporation 1999 Employee Stock Option Plan.
27.01 Financial Data Schedule.
- ------------
* Incorporated herein by reference to our Annual Report on Form
10-K, filed on May 4, 1998 (Reg. No. 001-13927).
** Incorporated herein by reference to our Annual Report on Form
10-K, filed on April 28, 1999 (Reg. No. 001-13927).
*** Incorporated herein by reference to our definitive Proxy
Statement, filed on May 11, 1999 (Reg. No. 001-13927).